What is representative APR?
Written by PayPlan on 14 October 2019
Whenever you apply for a loan or finance, you’ll come across the term APR, which stands for Annual Percentage Rate. If you borrow any money, the APR is simply the amount of interest that’ll be added to the total amount you borrow, plus some extra costs– simple, right? Where this becomes slightly more complicated is when APR becomes something called representative APR.
You’ve likely seen the term ‘representative APR’ advertised on television or online. Representative APR means at least 51% of the people who apply for the loan will get it at the advertised rate (or even lower). This means that the rest of those who apply for this loan could get a different rate than the representative APR advertised.
How can I get into the 51% of people who get the advertised representative APR?
Companies advertising loans with representative APRs need to give at least 51% of people who are accepted for the loan the rate they’re advertising, or lower. To ensure you’re one of these people, it’s essential that you have a good credit score.
When deciding who they want to give the advertised rate for, companies will look at your credit score and credit history. If you’re someone with poor or little credit to your name, it’s likely that you’re going to be charged a much higher rate than what’s being advertised (they may not offer you the loan at all if your credit score is particularly poor).
Likewise, the company advertising the representative APR will ensure that it gives the advertised rate or lower to 51% of its applicants with the better credit scores.
What this means for you
Essentially, it means that if you apply for a loan with a representative APR you won’t know how much you’re going to be paying on it (this is called the real APR) until you’ve actually applied for the loan and the agreed rate is in front of you.
Unfortunately, many people simply apply for the loan when they see the representative APR advertised and assume that’s what they’re going to get regardless of their credit score – only to then find out that they may actually be paying a higher rate than they thought they would.
How is representative APR different to interest rates
Understandably, you might be wondering how an APR (representative or otherwise) is any different to an interest rate at this point; after all, they do sound fairly similar. There’s an important difference between the two, however.
An interest rate is simply the rent that a lender charges you to borrow a sum of money from them e.g. a loan of £10,000 with a 5% yearly interest rate means that you’d pay £500 in interest fees to borrow the £10,000.
An APR, on the other hand, is the yearly interest rate plus any other costs associated with the loan, such as service charges, origination fees or closing costs, for example. What’s more, because APR is calculated on an annual basis, it’ll be higher than the interest rate for loans with higher repayments.
Because an APR includes all of the fees that you’re going to be paying for a loan, it’s often quoted that an APR reflects the true cost of borrowing, whereas with interest rates it’s a good idea to be careful, as there may be more costs that you need to pay for in addition to the interest rate itself.
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