When you look around for loans, credit cards, car finance and other kinds of credit, you’ll notice that providers will talk about APR.
Whether it’s personal APR, representative APR, or even APRC, these terms can be confusing at first glance. However, they are nothing to worry about and are there to help you when you want to take out credit.
In general, the APR – or annual percentage rate – shows you how much it will cost in total to borrow money over one year.
In this article, we explain APR, representative APR and APRC, looking at how you can use them more effectively to compare loans, credit cards and other types of credit.
What does APR mean?
APR stands for annual percentage rate and illustrates how much you will pay to borrow money over one year. APR includes:
- interest (the rate you are charged by the provider to borrow money)
- fees (any standard charges such as application fees or annual card fees)
The APR figure represents the yearly cost of borrowing money, combining interest and fees.
The lower the APR, the cheaper it should be for you to borrow.
When you search for credit, providers need to give a representative APR to allow you to compare different products on a like-for-like basis. Because lenders can apply interest in different ways and charge different amounts in fees, it can be difficult to see which option offers you the best deal if you consider these factors individually without a representative APR.
When you apply for credit, the provider should tell you what APR you qualify for – this is your personal APR. However, you won’t have to work out the APR yourself, as the lender will do this for you, using the official formula from the Financial Conduct Authority.
Lenders must tell you your personal APR before you sign on the dotted line to take out a personal loan, credit card or other form of credit.
What is representative APR?
The representative APR is the APR that a firm reasonably expects 51% of its applicants to be offered.
It means that at least 51% of successful applicants will be offered this advertised rate, while 49% could, in theory, be offered a higher rate.
Lenders are required to show this representative APR figure when they advertise their products to help consumers compare providers. However, you are not guaranteed to receive this rate if you apply for credit from that lender.
Representative APR is calculated in the same way as APR, adding together the interest rate and other standard fees to show how much it will cost to borrow over one year.
You can see the representative APR without needing to apply for that particular loan or credit product.
What is credit card APR?
With a credit card, you aren’t borrowing a lump sum to pay back over a fixed term, so lenders need to make assumptions when giving you an APR.
Credit card APR is typically based on the assumption that you spend £1,200 on day one and pay it back in regular monthly instalments over one year, without spending any more on the card (or paying back any more than the agreed instalment).
APR on a credit card also assumes that you only use your card for purchases, with the figure based on your standard purchase interest rate. Different rates may apply if you use the card for other transactions, such as transferring money or cash withdrawals. It also doesn’t take into account fees for late payments or going over your credit limit.
Ultimately, keep in mind that the fees you pay will likely depend on how you use the card – and the rate you actually receive will be based on your personal circumstances.
How does APR work?
Looking at the interest rate alone won’t necessarily tell you which product is the cheapest. For example, a loan with a low interest rate could appear to be the best option, but you may need to pay a high arrangement fee, which could make it more expensive than other loans.
The APR takes all these factors into account, giving you one figure that shows you how much you can expect to pay when you borrow from that provider.
For example, the interest rate on two loans could be 5%. This could indicate that they will both cost the same.
However, Loan A may charge an arrangement fee, which means it is more expensive than Loan B which doesn’t charge a fee.
While the interest rate doesn’t reflect the added cost of any fees, the APR does. This means the APR on Loan A will be higher than on Loan B, showing you which loan is cheaper overall.
The APR is a standardised way of showing the cost of borrowing, which allows you to compare products more easily.
What affects my actual APR rate?
The actual APR you are offered once you apply can vary due to your individual circumstances, such as your credit score, how much you want to borrow and how long you want to borrow the money for. The APR you will actually pay – not the advertised representative APR – is usually referred to as your personal APR.
If you have a good credit score, lenders are more likely to offer you loans with a lower APR as you are considered a lower risk.
What is a good APR?
The lower the APR, the better, because it won’t cost as much for you to borrow.
However, there is no standard figure that is a ‘good’ APR or a ‘bad’ APR. Whether an APR is good or not will depend on your individual circumstances, as a competitive APR for someone with a bad credit history may be considered high by someone with a better credit score who qualifies for lower rates.
APRs and short-term loans
If you want to borrow over a period of less than a year, then looking at the APR could be confusing.
APRs show how much it will cost you to borrow over the course of one year, so if you want to take out a short-term loan over several months, you may not pay as much as the APR suggests.
To help consumers see exactly what the cost of borrowing is over a shorter period of time, lenders may display the total amount payable. The total amount payable is the actual amount you will repay during the loan term, including interest and fees, so it could be a more useful point of comparison than the APR.
What is APRC?
APRC, or annual percentage rate of charge, is similar to APR. APRC is specifically used to show the total cost per year of mortgages and secured loans, as the interest rate may change during the loan term. The APRC includes these interest rate changes and any fees in its calculations, to come up with a single figure to help you compare products.
The APRC is calculated assuming that you will keep the secured loan or mortgage for the full term.
So, for example, if a mortgage has an arrangement fee and an introductory offer with a lower rate of interest for the first few years before moving you to a higher standard rate for the rest of the term, the APRC will take this into account.
It can make it easier to compare products, as it can be difficult trying to work out which loan or mortgage offers the best deal solely by looking at introductory rates, the rate you’ll pay for the rest of the term and any additional fees.
However, it’s worth remembering that many people won’t stay on the same agreement for the whole mortgage or secured loan term, as they might remortgage once the fixed-rate introductory deal finishes, for example.
As a result, the APRC, which shows the total cost of the secured loan for the whole term, may not be as significant to you as the initial rate of interest.
Understanding APR and representative APR is crucial when it comes to comparing loans. The representative APR can give you a general idea of the APR that lenders might charge, but you should always remember that you may receive a higher APR than the one advertised.
You can use the APR to compare how much it will cost you to borrow, without worrying that you’ll get caught out by any hidden fees.
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