What does APRC mean and why does it matters when borrowing?
What does APRC mean and why does it matters when borrowing?
Need a mortgage or secured loan, but can’t decide which one to choose? Looking at the annual percentage rate of charge (APRC) is a way of comparing the cost of different loans to find the right one for you.
What is APRC?
APRC stands for annual percentage rate of charge. It shows you, as a percentage, the annual cost of a secured loan or mortgage. It brings together all charges (such as fees and other costs), calculated as if you kept your secured loan or mortgage for the full term without changing it. It is used to compare mortgages and homeowner loans – the types of loan that are secured against your house.
Because some mortgages can offer a lower rate of interest for the first few years, the way the APRC is calculated reflects this, whereas APR uses just one rate. APRC is designed to help show potential borrowers the impact that the different rates and any charges could have over the lifetime of the mortgage, thereby enabling you to compare more easily between alternatives.
It helps you compare the overall mortgage or secure loan costs from different providers against the same parameters. Some mortgages may have a low interest rate, but by the time you add in all the charges, it could work out to be more expensive, and the APRC helps borrowers see that.
For example, imagine you are buying a £150,000 house and have a deposit of £30,000. The APRC will help you compare two possible mortgages for £120,000.
- Loan A has a starting rate of 0.99% for 24 months that then increases to a standard rate of 4.99% for 23 years and set up fees of £2,366
- Loan B has a starting rate of 1.39% then moving to the higher a standard rate of 4.75% with no set up fees.
At a glance, it’s hard to work out if the lower initial rate compensates for the higher standard rate. Here's where the APRC allows you to make a comparison. Despite having a lower starting rate, loan A has a 4.5% APRC, while loan B comes in at 4.2% APRC so would be cheaper over the lifetime of the mortgage.
Any homeowner loan, secured loans, mortgage or second mortgage – all different names for loans that are secured against your home – will show an APRC. Don’t forget – there is a difference between a secured loan, where your home is at risk if you don't keep up the payments, and an unsecured loan.
You can compare mortgages and remortgage with Compare the Market.
How useful is the APRC for comparing the cost of mortgages and secured loans?
It depends. The APRC is calculated to assume that you keep the same mortgage/secured loan product and provider for the whole length of the loan (usually 25 years) and that interest rates don't change. This can make it of limited use as most people won't stay with the same provider. People move home, and many borrowers compare deals when their fixed term comes to an end and remortgage or switch to a more competitive deal. If you’re going to be an active switcher, the initial rate might be of more importance to you.
However, it can be a useful tool to allow you to see the impact of different interest rates or different fees on the overall cost between different providers.
Loans, interest and APRC: how they work together
If you take out a secured loan, you’ll need to pay interest on it. The interest charged depends on:
- how much you want to borrow
- how long you want to borrow the money for
- your individual circumstances, including your credit score – so how much of a risk the lender considers you to be
So, for example, while the headline/representative APRC for a loan might be 5%, your personal APRC might be 8% because once you have applied, the bank then takes into account your personal circumstances.
How to get a loan with low APRC
The business of offering mortgages and secured loans is very competitive and loan providers are often trying to attract customers with their most affordable rates. But getting a low APRC is influenced by:
- your credit record – to get a loan at the lowest APRC, you’ll need a very good credit history. If your credit history is damaged or you haven’t borrowed before, you may find that you have to pay more. You can check your credit score for free with the main credit reference agencies:
- How much you want to borrow – generally, the more you borrow, the lower the rate offered. However, you should only borrow the amount you can afford to pay back, as even though the rate might be lower you could end up paying more in interest as you are borrowing more.
- The length of time you borrow for – mortgages are generally 25 years, but you can find longer or shorter terms. If you are taking out a mortgage or secured loan on your home, extending the term will drive down your monthly repayments and mean you pay less over the course of the year for example, borrowing for 10 years instead of 5 years. But while the monthly payments may be lower, the overall cost of the loan will be higher because you are borrowing the money for longer and as a result paying back more interest. So be careful and don't be seduced by lower monthly payments over a longer period. The golden rule of borrowing is to borrow as little as possible and pay it back as quickly as possible.
Even with a low APRC, you should carefully budget for any borrowing. You don’t want to put yourself under unnecessary financial strain in the future.
APR and AER
APR is a way of comparing loans or credit and it works in a similar way to APRC. It includes both the interest rate and fees for borrowing each year to help you compare between different offers.
AER (annual equivalent rate) is what’s used to compare savings accounts. AER works by assuming you’re going to put your savings away for a year. It takes into account any compound interest plus any bonus introductory rates.
Finding the right loan for you
We’re here to make things as straightforward as possible. When it comes to comparing loans, we’ll make it clear what the APRC/APR is, what you need to pay each month and overall. Get a quote and find the right deal for you.