Whenever anyone talks about any kind of loan, mortgage or any type of borrowing the most common question thrown into the conversation is: “What is the APR?”
This is perfectly normal as the APR (Annual Percentage Rate) has been given to us to be able to use as a tool to compare different financial products. But is it 100% reliable?
When I speak to people about borrowing I often tell them that the most important aspect of borrowing any money, whether a small payday loan or a large mortgage, is to look at your ability to pay it back. Basically, can you afford it? The APR on the “can I afford it” scale is irrelevant. If you cannot afford a loan that is 6% APR then there is no point taking it purely because it’s a “good APR.” 
So, why are APR’s confusing? Take these 2 examples:
1. £300 borrowed over a 28 period with a Payday Loan could cost you £375 to pay back. When you need quick cash this may not be seen as an excessive amount to pay back. However, the APR on this type of loan could be 2,000%+. Why so high? It’s because the loan is taken over such a short time-frame. As I mentioned before, can you afford to pay £75 in interest for emergency cash from a payday loan? You probably can. The APR, in my eyes, is therefore irrelevant.
2. A mortgage of £132,000 over 19 years at an APR of 3.9% would cost you around the £810 per month mark. As I mentioned before – your first question should be the affordability. Secondly, 3.9% APR is a very good rate for a mortgage in the UK currently. All the “APR hunters” would therefore be happy. However, over the 19 years the total amount paid back would be £52,000+ on top of the £132,000 borrowed.
You can see from these 2 examples in comparing a 2,00o%+ APR to a 3.9% APR it is very difficult. The term of borrowing the money changes the APR so much. In general, the longer you pay a loan over the lower the APR. However, as you are borrowing over a longer time period you will actually pay more interest. Clear as mud?
I was very much confused about APRs but now my all confusion are cleared.. thanks for this nice article.
Let me see if i got this righ.
When taking a long term loan i should care about APR, but when taking a short term loan i should only care my ability to pay back the loan.
I only just learned that there was a thing called APR. Thanks for expaining this.