What is representative APR?

9 min Read Published: 15 Mar 2024

What is representative APRThe representative APR is a figure that borrowers can use to compare the cost of loans and credit cards. Taking out a loan or getting a credit card means taking on debt, and debt can be expensive. It is crucial to have a good idea of how much it is going to cost you before you apploanly, especially as making several applications in a short time period will have an effect on your credit record. In this article, we will take you through the ins and outs of representative APR to help you get the best deal possible on a loan or credit card.

What does representative APR mean?

Representative APR (Annual Percentage Rate) is the figure lenders provide to allow customers to compare products. It is the minimum rate that the lender expects to offer to at least 51% of successful applicants. All lenders calculate it in the same way so that customers can see which is the cheapest out of multiple deals. Like the standard APR figure, representative APR includes the lender’s compulsory fees.

As the representative APR is the minimum that only 51% of applicants will receive, the other 49% of customers could be offered a higher rate. This means that the representative APR is not necessarily the figure you will be offered by your chosen lender if your application is successful. That rate will be a personal APR based on your individual circumstances and credit history, as well as how much you are looking to borrow and for how long.

Representative APR example

The best way to see the importance of representative APR is through a practical example. Below are two loans for the same amount with the same loan term.

Loan 1 Loan 2
Loan amount £5,000 £5,000
Loan term 3 years 3 years
Interest rate 6% 5%
Arrangement fee £50 £200
Total cost £5,475.95 £5,394.76
APR 6.67% 7.64%

You can see that despite loan 1 charging a higher rate of interest than loan 2, the APR on loan 1 is lower. This is the effect of including fees in the APR. Loan 1 is cheaper overall because the reduced fees outweigh the extra money paid in interest.

In this example, the lower interest rate could persuade a borrower that loan 1 is cheaper, but that would be incorrect. The representative APR allows the borrower to compare both loans and see that loan 2 is the cheaper option overall.

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What is APR?

The APR shows you how much it will cost to borrow money over one year. It is calculated from the rate of interest you will be charged on the debt and the compulsory fees you will need to pay to the lender. 

It is a way of displaying the cost of borrowing from a certain lender. The APR can help prospective borrowers compare multiple lenders with one another to find the best deal.

Why is APR important?

Paying off a high APR loan is expensive, as you are spending extra money on interest or fees, or both. With a loan, every month you will repay a portion of the money you have borrowed (the loan capital) and some interest. The balance of how much interest you pay and how much debt you repay will shift as the term goes on. With less money to repay later in your term, there will be less interest to pay too. This means that you spend more on interest at the beginning of the term and more on paying off the capital towards the end, but the monthly amount stays the same.

How does APR work?

A low APR means you are paying less to borrow money. A high APR means borrowing is more expensive.

Comparing interest rates alone will not give you the full picture on which loan or credit card is the cheapest. This is because there may be extra fees to pay on top of the interest. The APR takes into account fees, making it a better tool to use for comparison purposes.

Keep in mind that the APR does not take into account every possible fee you might be charged by the lender. These include late repayment charges, fees for exceeding your credit limit and cash withdrawal costs.

Is representative APR useful?

The fact that you may not be offered that specific rate is an obvious limitation of using representative APR to compare loans or credit cards, however it is likely to be the best way to initially judge a provider’s deal. You can see the representative APR when you compare lenders online, before you start the application process. This can help you get a good idea of which options might be the cheapest before you commit to the full application. Applications for credit will usually involve a hard credit check. Too many of these in a short period can have an impact on whether you are approved for loans or credit cards in the future.

You can get an idea of how likely you are to be approved for credit by checking your credit score. You can read more about improving your credit score in our article 'How to improve your credit score quickly'.

Another limitation of representative APR is it doesn’t include charges for late repayments, exceeding credit limits or cash withdrawals. These last two charges apply to credit cards, which are more difficult to compare using representative APR. 

How does representative APR on a credit card work?

The representative APR for a credit card can be more complicated than for a loan. With a loan, the borrower receives all of the money upfront, then pays back the capital with interest over an agreed period. Credit cards are more complicated because there is no guaranteed amount of borrowing, only a credit limit. It is also quite common for monthly credit card repayments to be uneven, as many people simply pay off the balance in full every month or pay the minimum amount.

In order to calculate the representative APR on a credit card, lenders have to make a couple of assumptions based on a representative example. The first is that someone will make one big purchase of £1,200 when they first get the card. The next is that they will then pay off the card in equal instalments over a year. Obviously this is not how most people use credit cards.

The representative APR is still a useful tool for comparing credit cards, especially if you are looking for a 0% or low interest credit card to spread the cost of a large purchase. If you want a credit card for everyday spending that you will pay off in full every month, you may prefer to focus on rewards and bonuses, rather than APR. This is because you will not have to pay any interest if you pay off your credit card bill in full every month.

How to find out which credit card is best for you

Comparing different credit cards is a key part of getting the best deal for you. Money to the Masses has helped to simplify this process by partnering with Creditec*, an online comparison service. You do not need to trawl through countless different provider websites hunting for the best cashback or lowest fees, as Creditec’s personalised search results will show you the key details you need to know in one place. Your tailored list will also feature the cards that you are more likely to be accepted for, cutting down the chance of any applications you make being rejected. Your search results are built using a soft credit search, so there will be no damage to your credit score. You can start your search by clicking this link*.

What is a good representative APR?

A good APR is difficult to quantify. What might be a great rate for one applicant with a poor credit history, could seem astronomical to someone who has a good credit history. It is true that borrowing has become more expensive in recent years after a period of record-low interest rates. However, the national picture is likely to be less important than your personal situation when it comes to borrowing.

The best attitude to take is that a good APR is usually a low APR. The APR is the cost of borrowing money, so lower means cheaper.

What is a personal APR?

While the APR of a loan or credit card is useful for comparing providers, it is unlikely to be the exact rate you are offered. The rate you will pay on your borrowing will be a personal APR. This is calculated based on your borrowing history and financial circumstances, as well as the length of the loan term and the amount of money you are being lent.

This is an important fact to remember when you compare loans. What you see advertised is not always the rate you will get – especially if you have a poor credit history. The representative APR is the minimum offered to 51% of successful applicants, which means that those applying with a troubled borrowing past will be most likely to end up in the other 49%.

You may not actually find out what your personal APR is until after you have applied for your loan. This can be frustrating as applying for a loan usually involves a hard check on your credit file. Too many hard checks over a short period can make it trickier to borrow money in the future.

The reason lenders do this is to get a better idea of how likely you are to repay the loan on time and in full before a final offer is made. Someone with a good credit history may seem like a more reliable borrower to a lender, so they could be offered a lower personal APR. Someone with a poor credit history could be seen as a risk to lend to, so the provider will want to be paid a higher rate of interest in exchange for taking that risk.

What is APRC?

An APRC (Annual Percentage Rate Of Change) is a figure used to measure the cost of variable rate borrowing. This could be a secured loan or a mortgage, as the interest rate on this type of borrowing can change over the course of the term. The APRC still includes all compulsory fees and is a figure that customers can use to compare loan providers.

You can read more about secured loans in our article 'What is a secured loan?'.

The downside of using the APRC to compare loans is that it assumes the borrower will stick with that product for the full term. For mortgages and secured loans, that is not guaranteed. This means that the ‘total fixed term cost’ figure or initial rate of interest could be more useful than the APRC. If the loan becomes more expensive after an initial fixed term – like it can with a fixed term mortgage – borrowers can usually move onto another deal at a different rate.

How to find a low APR loan

The best way to find a low APR loan is to compare loans by the representative APR. This can be done through a comparison site or by looking at lenders individually.

The representative APR is not a precise indicator of what the loan will cost you, but it can point you towards which lender is broadly the cheapest. The final cost will depend on your financial circumstances and credit history.

Other than comparing deals, you could find a cheaper loan by building a better credit history. Lenders generally charge a higher APR to borrowers considered to carry more risk. This could be because they have a poor history of repaying loans, or because they have no credit history available. A borrower with a good credit history is likely to come across as less of a risk and could be offered a better deal. You can find out more about building credit in our article ‘How to improve your credit score quickly’.

How to find a low APR credit card

Comparing credit cards by APR can be tricky, especially if you plan to use the card for everyday spending. However, 0% is generally a good sign when it comes to APR. There are many 0% purchase credit cards available on the market, though most sharply increase the rate of interest you will need to pay once you have had the card for a year.

You can read more in our article ‘Compare the best 0% purchase credit cards’ to see what is available.

Remember that the APR is going to be irrelevant if you pay off the card in full every month, but the interest could pile on pretty quickly if you miss a payment or only pay the minimum payment each month. Many premium cards with high-value rewards or cashback tend to charge some of the highest rates. If you know you can pay it off every month, the rewards could be worth the risk.

Successfully applying for a card that offers 0% APR or premium rewards can be tricky if you have a poor credit history. In this case you could be better off first taking out a credit builder card, then applying for a low APR option in the future. We have more on building credit in our article ‘Credit-builder cards – which is the best credit card if I have poor credit?’.



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