When considering taking out a loan, it's important to understand the true cost of borrowing. This is where the APR (Annual Percentage Rate) comes in. By law, lenders are required to show you the APR for a loan, allowing you to compare different offers from different lenders.

So, what exactly is APR? Simply put, it is the total cost of borrowing money for a year, expressed as a percentage. This includes not only the interest rate, but also any associated fees for the loan.

It's important to note that the APR is calculated in the same way by every lender, making it easier for you to compare different loan offers. This calculation assumes that the lender charges interest on interest, and that any associated fees are included in the overall cost.

However, it's worth mentioning that not all lenders charge interest on interest. At Kravings we do not charge interest on interest, meaning that our APR may be lower than other lenders.

So why is the APR typically higher than the interest rate? This is because the APR takes into account all the extra costs of the loan, giving a more comprehensive view of how much you will actually pay for borrowing. These extra costs can include things like origination fees, which are fees charged for processing the loan.

Let's look at an example to better understand how the APR works. Say you take out a personal loan of £10,000 with an interest rate of 5%. However, the lender also charges a £200 origination fee. In this case, the interest you pay would still be calculated at 5%, but the APR would be higher to reflect the additional £200 fee as part of the overall cost of the loan.

In summary, the APR is an important factor to consider when taking out a loan. It represents the true cost of borrowing and takes into account all the extra costs associated with the loan. By understanding the APR, you can make a more informed decision when comparing loan offers from different lenders.