APR stands for Annual Percentage Rate: the total cost of borrowing a certain amount of money for 12 months. It includes the interest you’ll pay on car finance, as well as any fees associated with the borrowing.
Let’s say, for instance, you borrowed £10,000 over three years to buy a new car. If the APR is five percent, the finance company will calculate this five percent rate in years one, two and three. The lender will then add it onto the amount borrowed and split the total into 36 monthly payments.
Although the monthly repayments are fixed, the earlier payments will include more interest but less of the loan balance. Things change towards the end of the finance period, when the repayments include less interest and more of the balance.
The APR rate will vary depending on the make and model of car, plus any special offers available. Recently, rising interest rates have made finance less affordable – not only for cars, but also mortgages and other types of loan.
What is representative APR?
There’s a big difference between actual APR and representative APR. Both are calculated in the same way, but representative APR means that only 51 percent of the applicants will actually get the rate advertised. Up to 49 percent of borrowers will be offered a different rate of APR, while some people could be rejected.
The rate is likely to be higher than advertised, which means borrowing could be more expensive than the example presented in the car advertisement. As stated by Confused.com: ‘the pitfall of this is that many people would assume that the representative APR is what they’d get. Then when the loan is agreed, the rate can shoot up and make paying the loan off more difficult to manage.”
Exact APR – also known as personal APR – means the advertised APR is the rate you’ll get when borrowing. If a car is advertised with an exact rate of three percent, that’s the rate you’ll be offered, so you’ll know the exact amount you have to repay.
Need more help? The handy video above explains representative APR in a nutshell.
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