Welcome to Checker

What is the APR?

The APR is a measure of the cost of each credit agreement, taking into account all the charges made under the agreement. It enables you to compare the cost of each deal and work out which is the best value for you. So you can compare one hire purchase agreement with another However, you should not attempt to compare a mortgage with a credit card deal. Each one provides different terms, so you should not expect to compare the two.

How is the APR obtained?

The new law created the idea of the Present Value. For every loan made, there are going to be one or more repayments or other charges, each made at a particular time. The Present Value of each sum is the value of that future payment as at the date the loan is made. Except where a credit deal is "interest free", the total of future payments will always be more than the amount borrowed, taking into account the lender's risks such as default or loss of income from investing the loan money (and the need to make a profit!). The Present Value Rule says that, where the amount of an individual future payment is £ A , and this is paid t years from the date of the loan, then the Present Value of that payment is P at a rate of charge of r where Very few agreements will have a single repayment. For most loans, there will be many payments and charges, so there will be lots of Present Values P1, P2, P3 ....... Pn . These will need to be summed together to balance the amount originally borrowed. The value of r which satisfies that equation is termed the Annual Percentage Rate or APR.

As an example, consider a loan of £100, repayable by three monthly instalments of £33, and where the lender charges a £5 fee at the date of the loan to cover his administration costs. r has to be calculated from the following equation, where four Present Values are put equal to the amount borrowed: which can be solved for r to give a value of 28.2 for the APR (the law allows for the APR to be given to one decimal place).

One other comment concerns credit cards and similar offers, where the charge is made monthly as a percentage of the balance outstanding. Assumptions are made to allow for the APR to be calculated. For most circumstances, it is easier to use a computer program to obtain the APR. The one used by most enforcement bodies (Trading Standards and the Office of Fair Trading), as well as by many lenders, is maintained on this website and you can download it by clicking here.