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16 May 2019
Chris Torney Chris Torney

What is APR?


Car on calculator, working out APR

Over the past few years there's been a significant increase in the number of people opting to buy their new car with some form of finance deal.

As is the case with personal loans or credit cards, there can be a lot of jargon involved in car finance – and one of the most important terms to understand is APR.

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What is APR?

APR stands for annual (or annualised) percentage rate. In some cases, the APR is the same as the annual interest rate – but there's an important distinction with an APR.

The APR figure is designed to show the total cost of a finance deal in terms of what the customer will be paying on a yearly basis. This includes not just the annual interest costs, but also any extra fees and charges spread equally over the term of the loan.

These could be initial administration fees or the final exit charges that might be applied at the end of a hire-purchase agreement, for example.

READ MORE: Car finance jargon explained

How to calculate your APR

To illustrate how an APR is calculated, let’s take an example of a hypothetical car loan for a car worth £11,000. If the buyer has £1,000 to put down as a deposit, the loan itself would be for £10,000.

At an annual interest rate of 3.9% over four years, the total cost of interest would be £781.44.

It's worth noting that there may be additional charges from the lender, such as an initial admin fee or a final payment. These would be factored into the total cost of credit over the term of the finance agreement, and could increase your APR as a result.

The below tables show some illustrative examples of different APRs and how they could impact your repayments. These examples include 10% deposits as you'd usually find with hire purchase (HP) or personal contract purchase (PCP) agreements. If your car finance agreement was a personal loan, you'd not normally need a deposit.

Car value
Loan amount
Monthly without interest
Monthly total repayment
Total cost
Charge for credit

Why is an APR useful?

Financial regulators in the UK oblige lenders to state the APR of any credit deals they offer. This enables consumers to get a true picture of the cost of any loan, credit card or car finance package they're considering.

This means that lenders can’t pull the wool over their customers’ eyes by offering credit at low rates of interest but then adding on steep hidden charges. APR is a particularly useful tool for ranking different credit offers – it means that fair and accurate comparisons can be made.

Car finance APR handshake

Different types of APR

While APRs should make things simpler for borrowers, there are other potential complications to be aware of, such as the different types of APR.

You'll often come across something called a 'representative APR', especially in marketing material. This is a figure used by lenders to show what the cost of credit would be for the majority of borrowers. According to UK financial regulations, this should be the rate that's offered to at least 51% of customers.

The reason that a representative rate exists is because not all borrowers might be eligible for a lender’s most competitive rate of interest. People with damaged credit histories, for example, could be charged more interest than others in order to reflect the higher risk they pose to the lender.

The most important figure for an individual borrower is their 'exact APR' – that is, the total cost of the loan based on their personal circumstances such as credit history and income.

To get your exact  APR, you can compare finance deals with - when you get a quote, the APR you see is the APR you get. Getting this nailed down early on means you can budget your repayments with greater ease.

READ MORE: Representative APR vs exact APR

What factors can affect your exact APR?

Each lender will make a variety of checks on would-be borrowers before deciding whether to offer them a loan – as well as what the appropriate rate of interest should be.

The main check will be on an your credit file – a record held by credit agencies such as Experian, Equifax and CallCredit.

This file shows what previous credit agreements you have as well as whether you've missed any repayments or made them late. The credit file is also used to confirm personal details such as date of birth and address in order to avoid potential fraud.

Lenders check the affordability of the loan you're interested in. This ensures you have sufficient spare income to cover repayments after other expenses such as your rent or mortgage, bills and perhaps also other debt are taken into account.

They'll then use your credit score to set your personal rate of interest which, when combined with any extra charges, is used to produce your exact APR.

An exact APR is more widely referred to as a 'personal APR', to reflect the fact that the rate is likely to be more tailored to an individual’s circumstances than a representative APR.

READ MORE: How to improve your credit rating

What's not included in an APR?

Typically, any APR quoted by a lender will include interest charges as well as administration fees.

Some motor finance packages - hire-purchase in particular - may also have a fee at the end of the deal when you finally take ownership of the car. These should usually be included in the quoted APR, but you should check.

The APR won't include the cost of any initial deposit you put down on the loan. Nor will it cover the 'balloon payments' that are a feature of PCP (personal contract purchase) car finance deals.

At the end of PCP loans, customers usually have the option of making a large lump sum payment in order to buy their vehicle outright.

Alternatively, they can give their car back and perhaps use any equity – the difference between the car’s value at the time and the size of the balloon payment – as a deposit on a new deal.

But the APR on a PCP car finance package will typically only relate to the interest charges and any administration fees at the start of the loan.

READ MORE: Car finance - a whistle-stop tour


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