The APR condenses the cost of the loan into a single percentage, making it easy to compare with rival offers in Luxembourg or other EU countries. The APR is used Europe-wide and calculated by all European banks using the following standardised method: (Total amount to repay – Loan amount)/Loan amount x 12/Total number of monthly instalments = APR.
Since the APR is the interest rate of a loan, it can be fixed, variable or adjustable. A fixed APR means consistent monthly instalments over the duration of the loan. A variable APR means that the monthly instalments can vary depending on fluctuations in a benchmark. Adjustable-APR loans often offer lower monthly instalments to begin with, but these may increase over time.
There is also an APR for bank overdrafts. More commonly known as agios, this represents the interest rate on the sums the bank lends to overdrawn accounts. This APR is difficult to calculate, and therefore to compare, because the amount and duration simply cannot be known in advance.
In some European countries, including our neighbours in Belgium and France, there is an APR ceiling (maximum loan cost) beyond which a loan cannot be approved. Any lender exceeding this limit could face legal action.