If you have ever applied for any kind of finance, like a loan or credit card, you will likely have come across the term ‘representative APR’. This is a phrase that many gloss over or don’t fully understand, and it can make the whole process of applying confusing. Even if you know the meaning of APR you might not realise what makes it different in the calculations or why it is ‘representative’.
Here we take a look at representative APR to give you an understanding of what it is and how it will affect your application for finance. To do so, however, it is first important to know what APR is. For more information visit GuarantorLoansuk’s website where you can see their full list of the representative APRs and representative examples for each of their lenders loans.
What is APR?
APR stands for ‘Annual Percentage Rate’ and it is a compound interest rate that is used by the loan or credit card lender to show the rate of interest that would be charged for the borrowing of the money over a one year period. Clearly not all lending is done over a one year period – indeed, for many forms of finance interest is charged over an indefinite period as the debt rolls on for a considerable amount of time. However, APR is designed to give customers a direct comparison between products so all lenders must use the same calculation. This follows the Consumer Credit Regulations 2010 which actually introduced the term ‘representative APR’.
How does representative APR differ?
Before you apply for a loan a company will advertise a representative APR, so is this a good indicator of the interest that you will have to pay over the course of a finance deal? Well, to understand let’s look at what used to happen. Before the Consumer Credit Regulations 2010 introduced it, each lender and product had a different way of indicating interest. This led to some lenders using tactics such as fees and charges that would not appear in the calculation and allowed them to effectively advertise a much lower APR.
Representative APR takes this kinds of fees and charges into account when it displays the indicative APR – this means that now, all products display a directly comparable APR – for example, in credit cards, annual fees must now be included in representative APR.
How representative is it?
There are strict laws surrounding the APR that can be advertised for a product. This is due to the fact that the actual interest rate that will be offered to an applicant will vary based on a number of factors including income and credit score – so it is only when an individual applies for finance that they will actually establish the APR. However, clearly it means that if there were no laws governing the process, lenders could always simply advertise the lowest possible rate, even though very few customers would be offered that rate.
The regulations currently state that APR needs to be genuinely representative, and as such the advertised rate must be offered to at least 51 per cent of applications.
What else should be considered?
Remember that when you are applying for any kind of finance, that this means that 49 per cent of applicants will be offered a higher rate and you should check these thoroughly as to how much your rate is when you apply. It should also be noted that representative APR does not account for charges such as late payment fees. Sometimes these fees can be very significant, so check them closely.
Also, remember that the representative APR only shows rates that are offered to new customers, and these can differ greatly from the rates gives to existing customers.
What affects the APR you are offered?
It is also important to recognise that representative APR is only indicative of what a lender may offer, and if you are accepted for finance, this rate may have changed. The most important factor that can influence the APR you are offered is your credit score. If you have been turned down for finance or offered a rate that is substantially higher than the representative APR it can be a good idea to check your credit score through services and follow tips to improve your score in order to potentially secure a lower APR for future finance.