Annual percentage rates (APR)

Definition

APR (annual percentage rate) refers to the yearly cost of interest on borrowed credit.

APR is widely used on a range of credit products, including credit cards, personal loans and car finance, providing a simple way to compare financial promotions.

When you apply for car finance - or any type of credit, loans with the lowest APR are generally better, as you pay less in interest.

This will help to lower the cost of your Monthly Repayments.

Exact APR vs representative APR

Lenders will normally advertise their lowest possible APR to make their offer more desirable, but in most cases this rate is only available to individuals with an excellent credit rating.

An exact APR takes into account your personal circumstances including your affordability and credit history, so you can be sure exactly how much your interest will cost.

Without an exact APR, it can be tricky to compare your lending options. That’s where a representative APR can come in handy.

The FCA has very specific rules on calculating representative APRs.

This means lenders can only advertise an APR as “representative” or “typical” if 51% of their customers get that rate or lower. This prevents lenders from advertising rates that only very few people get.

Lenders show representative examples on their financial promotions, or adverts, to follow industry laws and guidelines.

To help you to compare products and provides a guide on how much taking out credit could cost.

A representative APR is therefore a more realistic and “representative” of the rate you will be offered, but it’s not the same as the APR you’ll pay, for that you’ll need an exact APR.

How is my APR calculated?

Your exact APR is calculated based on the strength of your Credit Profile.

If you have an excellent credit rating your APR is likely be significantly lower than an individual with Bad Credit.

This is because lending to someone with credit issues poses a greater risk to the lender.

Your APR offered may also vary depending on the term length and the amount borrowed.

APR vs flat rate

With APR, the amount of interest you pay is reduced year on year. This is to reflect the difference in the amount owed as the loan balance is reduced.

A Flat Rate on the other hand, does not factor in a reducing balance and remains the same throughout the agreement.

The cost of interest will vary depending on the type of Interest Rate quoted, so always ensure you’re comparing like for like.