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Jamie Gibbs

Representative APR vs exact APR

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Unravel the confusion behind APRs and make more educated choices when borrowing money.

Woman holding out hand for keys to her new car

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 were led to believe.

More confusing still is working out the interest rates set by finance companies and what ‘APR’ is all about. Let’s shed a little light on what that actually means.

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. This 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 will work out the 3% rate added in years one, two and three. They’ll then add it onto 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 three years, you’ll make monthly payments of £290.81. This will add up to £10,000 for the loan and £469.24 in interest and other charges.

Car finance

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.

What does representative APR mean?

Because we all have different credit profiles, not everyone is offered the same APR when they 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 particular lender will offer 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 are flat-out rejected by the lender.

The pitfall of this is that many people would assume that the representative APR is what they’d get, then apply. Then when the loan is agreed the rate can shoot up and make paying the loan off more difficult to manage.

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How is exact APR different?

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 tailored to your details and credit score. This may sometimes be higher than what a representative APR would show, but it’s accurate and not an advertising rate. There are no hidden extras, so you pay exactly what rate you’re shown.

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

Will getting an exact APR quote impact my credit history?

In order to show you an exact APR car finance quote, we’ll need to look at your credit history. This will be a ‘soft search’, so it won’t affect your credit rating at all. This means you can browse quotes on Confused.com without it affecting your ability to get credit in future.

This will only become a ‘hard footprinted search’ if you decide to go through with a loan or finance agreement.

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