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When you apply for a loan you may see that it is advertised with a representative APR. This means that it’s the APR rate that most people (at least 51%) receive when they apply for the loan.
But there is no guarantee that all borrowers will get the same rate. So, put simply, the representative APR (annual percentage rate) is a type of interest rate that explains the cost of borrowing money.
Loans are typically ranked by their representative APR and this makes them easier to compare. It shows borrowers what they are likely to pay on their loans and lenders should make borrowers aware of the representative APR when taking out a loan.
Also keep in mind that the rate of APR that you are charged by the lender will depend on several factors, like your credit history and income. So the APR is a good indication of what you will likely be paying, but it helps to do a pre-approval check to get a better idea of the offers you may qualify for.
APR stands for the annual percentage rate and it shows how much it costs to borrow money. It includes the annual interest rate borrowers pay, as well as any other rates included in the loan.
This figure shows the actual annual cost to the borrower for taking out the loan. This also represents the income that the company’s investors get for providing the money to borrowers.
Representative APRs include all interest rates, application fees, annual fees, and any other compulsory fees. It also makes it easy for borrowers to compare loans side by side. In addition to this, the representative APR provided by a lender should always:
Be representative of the offer given to at least 51% of customers.
Take into account any fees, charges, or extra costs associated with the loan.
Take into account compound interest.
People often confuse APR with HCSTC (high cost short term credit). HCSTC refers to any business offering short-term loans or credit with an interest equal to or above 100% APR and a loan term of 12 months.
Payday lenders are the most common companies in the HCSTC sector and almost every payday lender will advertise APRs in triple digits. But keep in mind that although all HCSTC loans have an APR of over 100%, not all of them are necessarily bad credit loans or payday loans.
In short, APR is the total cost of borrowing money over a specific period (e.g. 12 months). For example, if you borrow £10,000 with a 3% APR paid back over 36 months, the lender will work out what the 3% will be over the three years and add that to the £10,000 you borrowed and split it into monthly payments.
But, since everyone has a different credit profile, it is difficult for lenders to advertise an accurate APR rate that suits everyone. This is where representative APR comes in.
It looks at the lowest APR that a lender will offer to 51% of people. So if you see an advertisement for a loan that comes with a 15% representative APR, it means that 51% of people approved for that loan received an APR of 15%. The other 49% may have received a higher APR, based on their credit profile.
So a representative APR gives you a good idea of what most people get when they apply for that specific loan, but your APR might be more, or less, based on your own profile.
Here are a few examples of representative APRs from lenders as of March 2022:
First Direct
If you borrow £27,000 over 3 years at a Representative APR of 3.3% fixed and an annual interest rate of 3.3% you would pay:
Monthly payment: £788.18
Total charge for credit: £1,374.63
Total amount you repay: £28,374.63
Halifax
If you borrow £30,000 over 3 years at a Representative APR of 5.8% fixed and an annual interest rate of 5.65% you would pay:
Monthly payment: £907.93
Total charge for credit: £2,685.48
Total amount you repay: £32,685.48
AA (Members)
If you borrow £2,000 over 3 years at a Representative APR of 13.4% fixed and an annual interest rate of 13.4% you would pay:
Monthly payment: £67.04
Total charge for credit: £413.44
Total amount you repay: £2,413.44
Real APR refers to the interest rate you actually have to pay, rather than the advertised representative rate. The lender calculates this based on how ‘risky’ you are to them. They use various sources of information to determine this, including:
Your credit history
Your financial situation and current debts
Any dealings that you’ve had with the lender in the past.
The better these factors are, the more stable you appear to a lender and this will likely give you a better APR as you’ll be seen as a ‘lower risk’ to the lender.
This is why a good credit profile is crucial if you want the best interest rates when borrowing money.
In terms of credit cards, the representative APR assumes that you only use the card for purchases.
It doesn’t take into account the various fees and rates that may apply when you use it in different ways, such as for balance transfers or cash withdrawals.
It also doesn’t take into account things like late payments, going over the credit limit, or having any unpaid or returned payments. The representative APR only includes compulsory charges - so charges like insurance for payment protection isn’t included either.
Knowing what your personal loan rate is before you apply could save you time and make sure that the loan you want is affordable for you.
To make things simple you can talk to your lender and see what rate they can offer you, or you can request a pre-approval to get a better idea of what rate you could get.
Some banks offer an app where you can check your eligibility for a loan as well as specific loan offers and rates that apply to you based on your credit profile.
Keep in mind that loans are subject to application, your borrowing history, and financial circumstances.
APRC stands for annual percentage rate of change. Lenders are required to give you a detailed quote when you apply for a loan or credit card and this is a standard interest rate calculation designed to give you the total amount of interest you will pay throughout the term of your loan.
It should also include any extra charges you may have to pay to take out credit, including lender’s fees, valuations, and legal fees. The purpose of the APRC is to help you understand the true cost of what you’re borrowing.
There isn’t a set number in terms of what is ‘good’ for an APR. But typically, rates between 5% and 45% APR are considered to be good. This will of course depend on your credit score and your financial circumstances, so a good APR might be higher, or lower, for you.
It can be complicated to work out how much you’ll pay every year, especially for things like credit cards. This is because credit cards have flexible repayments and your provider will calculate interest on a daily or monthly basis. So the interest rate will depend on how your balance fluctuates during the year.
