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Representative APR vs exact APR

Buying a car on finance can sometimes be a headache. You’re offered a great deal, only to apply and find out it’s not as good as you expected.

More confusing still is working out the interest rates set by finance companies and what ‘APR’ is all about. Let’s take a look at what that actually means.

Women sitting in a car smiling as she holds the keys 

What is an APR?

APR stands for annual percentage rate

When you borrow money, the APR is the amount of interest that’s added to the total amount owed, and any other associated fees. 

APR is used to help you understand the cost of borrowing money and help you to compare different borrowing options.

Before you sign any credit agreement, all regulated lenders in the UK need to tell you what the APR is.

How does APR work?

APR is calculated per year, then split over 12 months to form your monthly payments.

Let’s say you borrow £10,000 for a car with a personal loan at 3% APR, to be repaid over 3 years.

The lender works out the 3% rate added in years 1, 2 and 3. They then add it to the amount borrowed and split the total into 36 fixed monthly payments.

This also takes into account the decreasing balance over time.

In this example, over 3 years, you make monthly payments of £290.81. This adds up to £10,000 for the loan and £469.24 in interest and other charges.

Is APR the same as interest rate?

Many people use the catch-all term ‘interest rate’ when talking about APR. The problem here is that it’s also used to mean the interest you earn when you put money into savings.

This is called the annual equivalent rate – or AER. It works in much the same way as APR. But where AER adds money to your savings pot, APR adds money to your debt.

APR also includes other borrowing costs - like compulsory fees - as well as interest to help you make meaningful comparisons between different offers.

What does representative APR mean?

Because we all have different credit profiles, not everyone is offered the same APR when they apply to borrow money.

This makes things tricky when a lender wants to advertise a particular offer. How can you show what people can expect to pay back and stay fair?

Representative APR tries to tackle this. It looks at the lowest APR that a particular lender offers to 51% of people who are accepted.

So let’s say you see an advert for a personal loan that offers 12% APR. This means that 51% of people who are accepted for that loan can get it at that rate.

The other 49% are accepted but are likely to be offered a higher APR. Representative APR doesn’t take into account the number of applications that the lender rejects.

The challenge with representative APR  is that many people assume it's the real purchase rate they get when they apply for finance. This can mean that when they're given their exact APR, the loan may not be as affordable as it initially appeared.

What does representative APR include?

Representative APR includes the costs of borrowing over the repayment length- this is mostly interest but also incorporates any compulsory fees like annual charges or application fees. It doesn't include late payment fees as these aren't paid by all borrowers.

How is exact APR different?

Exact APR is the real rate you pay for a loan, not a guide or example for illustrative purposes only.

Comparison of exact APR – currently only available with Confused.com’s car finance comparison – is ‘what you see is what you get’.

We work closely with a panel of lenders and brokers to give you a transparent look at your finance options.

So when you apply for car finance, the APR you see is the one you pay, based on your details and credit profile. This purchase rate may sometimes be higher than the representative APR used in advertising promotions. These are only used to give borrowers an 'idea' of what they can expect to pay.

There are no hidden extras with an exact APR, so you pay exactly what rate you’re shown. The only exception is if you make late payments, in which case you might have to pay additional charges.

Knowing what kind of rate you’ll be charged means you can budget your repayments with some peace of mind.

How do I find the best APR for car finance?

The best purchase APR for you is the one with the lowest rate over the period you need to repay the money.

Car dealerships are likely to offer you car finance but it's a good idea to shop around - for such a large purchase you don't want to pay any more than you need.

We can help you work out what type of car finance arrangement might work best for you and help you compare the exact options.

Will getting an exact APR quote impact my credit history?

In order to show you an exact APR car finance quote rather than a representative APR, we need to take a look at your credit history. But this is a ‘soft search’, so it doesn't affect your credit rating at all. This means you can browse quotes with us without it affecting your ability to get credit in future.

This only becomes a ‘hard credit search’ if you decide to apply for a loan or finance agreement.

What is a good APR?

The APR you get on any finance agreement depends on your credit score.

Generally the better your credit score, the better the  APR you can get and the more likely you are to get the representative APR used in advertising promotions.

The amount of money you're borrowing is also important. Usually larger loans over longer time frames have a lower APR than smaller, short-term credit agreements.

When you compare different finance options and see the range of APRs on offer for you, you can get an idea of what's a good APR for your particular circumstances.