What is APR?

What is APR? 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 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 low APR loan may cost you more money than a high APR one.

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%, as you might expect
Q: If we said we'd lend you £100 for a day at 3,678 % APR, how much would you expect to pay?
A: Probably much 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 3,678%, one day loan.

Even if you took out the 3,678% APR loan every day for a year, the fees and charges would be £365, which is £245 cheaper than the 600% lowest APR loan.

In summary, for loans less than a year the best way to compare loans is to look at the total cost to you in pounds.

Key things to realise about Smart-Pig loans

You will never need to pay back thousands of percent in interest. Our loans cost 0.8% per day, not compounded and applied to your balance each day. This stops at our interest cap of 50%. The most you can ever owe, even if you run into trouble, is 1.5 times what you 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. You can learn more about how Smart Pig loans work here.

What is APR? (for maths students)

So what is the actual calculation then? Below you can learn how to calculate loan APR; 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 what APR is see the Consumer Finance Association website.