Benjamin’s Musings

What Does an APR Really Mean?

The APR is the percentage paid annually on the outstanding balance of a loan. For this reason, on large amounts of money, the maths required to explain the structure of the repayment is complicated – far too complicated to explain here. However, with this basic example, from a simple loan calculator, you can see a clear pattern.

Scenario A: The man takes out a £180,000 mortgage to pay for his house purchase at 5% APR, he pays this over 25 years with monthly repayments. This comes in at £1,052.26 per month, meaning you’ll pay a total of £315,678.62. That’s £135,678.62 interest for the bank – an 80% profit over 25 years!

Scenario B: The man takes out a £180,000 mortgage to pay for his house purchase at 5% APR, he pays this over 15 years with monthly repayments. This comes in at £1,423.43 per month, meaning you’ll pay a total of £256,217.14. That’s £76,217.14 interest to the bank – a 35% profit over 15 years.

For a more complex mortgage calculator, take a look at Alliance and Leicester’s handy tool. It takes into account some more complex things, like your gross income and your outstanding credit commitments.

 Which looks better? Well scenario A wins in the short term because you’ll have to pay far less per month over the period. However, it’s not exactly good in the long term, in fact it’s nearly twice as much to pay over the period – not good.

Effectively, with a loan you want the lowest APR paid off in the shortest time possible. This way, in the long term, you’ll be better off. For one of the most competitive rates for loans in the UK, take a look at Alliance and Leicester’s website.