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Representative APR vs Exact APR for Car Finance

Buying car finance can provide you with a lot of unwanted stress. You can apply for what you think is going to be a great deal, only to find out that all is not as it seems. When you compare car finance deals, it seems to make sense to look for the product with the lowest APR. But car finance lenders often advertise representative APR, a rate which only around half of their customers actually get. Searching for exact APR could be a better bet for your budget, as it means you know exactly how much you’ll be paying back once the loan is agreed upon.

In this guide:

What is APR?

Simply put, APR is the overall cost of your loan. APR stands for annual percentage rate - when you borrow money, APR is added to the total amount that you owe. It’s calculated annually, then divided over 12 months to make up your monthly payments. When calculating APR, lenders combine the interest rate with any admin fees incurred through processing a loan. The amount that you want to borrow can also affect the APR that you’re offered. Some lenders will reduce APR if you borrow more money from them.

For example, let’s say you were to borrow £10,000 to buy a car, with 3% APR to be paid back over 3 years. Your lender will work out the 3% rate that will be added over those 3 years, add it to the £10,000 that you borrowed and split the total into 36 monthly payments. The decreasing balance is taken into account. However, additional benefits included in your car finance deal can reduce the amount you have to pay back. For example, some car manufacturers or retailers offer deposit contributions. Nevertheless, APR has a big say in how much you’ll have to pay back overall.

APR isn’t the same as an interest rate, because an interest rate can also mean the interest that you earn when you put money into savings.

What is representative APR?

Everyone has a different credit profile, so not everyone is offered the same APR when they ask to borrow money. However, this makes it difficult for a lender to advertise loan offers. How are they meant to work out an accurate rate before they have information on your credit history and financial situation? Representative APR tries to address this, by looking at the lowest APR that a lender will offer to 51% of people. So, if you see an advert for a car finance loan that offers 12% APR representative, this means that 51% of people accepted for that loan receive that APR.

The other 49% of people accepted are likely to be offered a higher APR, because they likely have lower credit scores. Representative APR doesn’t account for the number of rejected loan applications.

So, most people who don’t know about representative APR would assume that this is the rate that they’d be guaranteed to get when they apply. Once the loan is agreed, the APR can increase a lot, making the loan much more difficult to pay off.

What is real APR?

‘Real’ APR is the interest rate you actually have to pay, rather than the advertised representative rate. This is calculated by the lender, based on how ‘risky’ a borrower they perceive you to be. They decide this based on various sources of information, including:

  • Your credit history
  • Your financial situation
  • Any dealings that you’ve had with the lender in the past.

The better these factors are, the more stable you appear to a lender. So, this means you’ll likely be seen as ‘low risk’ and be accepted for credit with the lowest APR.

What is exact APR?

With exact APR, what you see is what you get. So, when you apply for car finance, the APR that you see is what you’ll get when the loan is agreed. Exact APR is tailored to your personal finance and your credit score. While this rate can be higher than a lot of representative APRs that you might see advertised, it’s more accurate. There’s no hidden charges, so you’ll pay exactly what you expect to pay. Choosing exact APR means that you can budget for your repayments with complete peace of mind.

Will an exact APR quote show up on my credit history?

To give you an exact APR car finance quote, lenders have to look at your credit history. However, they undertake a ‘soft search’ which doesn’t impact your credit rating at all. So, you can browse car finance quotes without impacting on your ability to get credit in the future.