APR, or Annual Percentage Rate, is a way of comparing the cost of loans. For loans under 1 year in duration, a loan’s APR represents the total cost of taking out that loan again and again until a year has passed, including any charges that would normally be applied, and borrowing more and more each time to pay off the last loan in full. APR is not always the same as the actual interest charged, which can be confusing!
We don't want to underplay APR as a measure of cost when borrowing, but it's important consumers understand it. In particular, a lower APR product may cost you more in £ terms than a high APR one.
An Example of How APR Sometimes Doesn't Make Sense
Say someone offers you a loan of £100 for 1 day. You have to repay back £101.
Q: How much has the loan cost?
Q: What's that as a %?
Q: So what is the APR of this loan?
A: 3678% (not 365% as you would expect)
Q: If we said we'd lend you £100 for a day at 3678 % APR, how much would you expect to pay?
A: A lot more than 1%!
Now take this case: borrowing £100 for 12 months at 600% APR means you have to repay £700, or 7 times what you borrowed. The 600% APR loan costs £599 more in fees and charges than the 3678%, one day loan.
Even if you took out the 3678% APR loan every day for a year, the fees and charges would be £365, which is £245 cheaper than the 600% APR loan.
Key Things to Realise About Smart-Pig Loans
You will never need to pay back thousands of percent in interest. Our actual loan charge are 0.8% per day, not compounded and applied to your balance each day. This stops at our interest cap which is 50%. So the most you can ever owe, even if you run into trouble, is 1.5x what borrow.
You will always see the total cost of your loan up front. When you use the loan-calculator tool on our homepage, you can immediately see how much the loan will cost you in cash terms. It’s split up into interest and charges so you can see exactly what’s going on. If you can repay early you just pay less! It’s fair and simple.
APR for Maths Students
So what is the actual calculation then? Many terms of the full calculation drop out when there is only one "drawdown" and one "repayment".
x = APR in %
c = Amount Borrowed
d = total amount to be repaid (in one payment on the due date)
s = duration of the loan in years (so number of days the loan is for divided by 365 days in a year)
For more information on APR see the Consumer Finance Association website.