What is loan APR?

APR is usually great for comparing the cost of loans, but for loans shorter than a year, APR isn’t easy to understand to work out how much your loan will cost. To help, we’ve written this article about how APR works.

Why do Smart-Pig loans have a high APR?

APR is used mainly to calculate the cost of longer-term loans. For loans shorter than a year, APR doesn't work how most people expect.

For Smart-Pig loans, the APR calculation actually shows the cost of borrowing again and again over the course of a year, repaying each previous loan by taking out a new bigger loan.

Not only can this situation not actually happen, it also means that for short-term loans, APR is more sensitive to the number of days you borrow for than it is to what you pay.

For example, a £100, one-day loan costing 0.8% per day, with an annual interest rate of 292%, has a Representative APR of 1733% but would cost you just 80p. You might consider that more reasonable than a £2000, one-year loan with an APR of 50% that would cost £1000 in interest! See How it Works for more about the cost of Smart-Pig Loans.

Smart-Pig’s annual interest rate is 292% per year, or 0.8% per day. However, we cap interest at 50% for each loan.

How can you compare the cost of short-term loans?

A better way of comparing the cost of short-term loans for students is to look at how much you’ll repay when borrowing the same amount. A useful figure is the total cost of capital (TCC) which is the cost of borrowing £100.

The best way of comparing the cost of our short-term loans is to look at how much you’ll repay when borrowing the same amount from different lenders.

What is representative APR?

Because APR is related to the length of your loan, even though all our loans have the same interest rate of 0.8% per day, every loan has a different APR. You’ll see the actual APR of your loan in your loan agreement and the summaries of this that we show you before you borrow.

Every quarter, we look at all the loan APRs we issued and find the lowest APR that was issued to 51% of the loans that quarter.

This means that our Representative APR changes each quarter based on the average length of loan customers took out the previous quarter – even though the price of our loans doesn’t change.

This also means that a company with a higher interest rate can have a lower Representative APR than a competitor that issues shorter loans, even though the shorter loans cost less both in interest and in cash.

How is APR confusing?

Just in case you haven’t reached this conclusion already, here’s an example of how APR probably doesn't work how you expect.

Someone offers you a loan of £100 for 1 day. You have to repay back £101.

Q: How much has the loan cost?

A: £1

Q: What's that as a percentage %?

A: 1%

Q: What is the APR of this loan?

A: 3,678%. (not 365%, which is the annual interest rate)

If we said we'd lend you £100 for a day at 3,678 % APR, you probably wouldn’t expect to pay £1 in interest – you would probably expect to pay a lot more. This is why APR is not the easiest way to understand how much your short-term loan will cost.

How is short-term loan APR calculated?

What is the actual calculation for loan APR? Here’s how to calculate loan APR for a bullet loan. A bullet loan is an industry term for a loan like Smart-Pig, where we send you money in one payment and you repay in one instalment after a set number of days. This is different from an instalment loan, which is repaid gradually over time in an agreed schedule (like a buffa loan).

For a bullet loan like one from Smart-Pig, many terms of the full APR 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 the number of days the loan is for divided by 365 days in a year)

How do you calculate loan APR in Excel?

You can calculate loan APR in Excel using the XIRR formula. This is great for when you need to calculate APR for a more complicated loan, where there is more than one drawdown or repayment.

American sites calculate the APR on short-term loans differently to the UK

In the USA, short-term loan APR works differently and is just the annual interest rate. This is the daily interest rate multiplied by the number of days in a year and is a much simpler way of comparing the price of short-term loans. Keep in mind that information you get about short term loan APR from US websites might give you the wrong advice for the UK.

Representative Example: £200 loan for 30 days. Interest 292% p.a. fixed. Total to repay £248.00. Representative 1270% APR.


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