Annualised percentage rate (APR)
This is how lenders illustrate the true cost of borrowing their
In the mortgage market the main reason for introducing the need to illustrate
loans in this way was due to the fact that lenders would give very good headline
rates but insist on all kinds of additional fees and costs. This in turn meant
that the loan was not as attractive as it was thought to be.
The use of APR means that the lender now has to display the total cost of
borrowing their money including any compulsory costs giving a true indication of
the overall cost and allowing borrowers to make a more informed decision.
Mortgages were originally excluded from the requirement to quote APR. The APR
calculation was designed more to reflect the cost of different types of
hire-purchase contracts which, at the time the legislation was drafted, were
frequently quoted on flat and fixed basis giving headline rates which were often
half the APR. It is a legal requirement that a true APR figure be provided with
any loan illustration.