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.
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.
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.
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.
If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this has in no way influenced this independent and balanced review of the product.