Representative APR vs Exact APR

Buying a car can be overcomplicated, especially if you are unsure what you want. Before you start searching, it's important to create a budget and stick to it to ensure you are not spending beyond your means.

Once you are set on your vehicle and affordability, you must decide how to pay for it. Over 90% of new cars get bought on finance due to the flexibility it offers.

While it's still not uncommon to buy a car outright with cash, the majority of brand-new and used cars get purchased with a finance plan to spread and fix costs monthly and across several years.

Do you have a car on finance and would like to reduce your monthly repayments? Sign up with Car Credible today; we can help you save money on your deal.

If you buy a car on finance, you will almost certainly be required to pay interest on your monthly payments, otherwise known as APR. That can also be a bit of a minefield, as there are different types of APR available.

At Car Credible, we aim to make car finance simple and accessible to everyone, and in this guide, we break down all the different types of APR and how each can impact you.

What is APR?

APR, which stands for the annual percentage rate, is the amount of money you pay to cover the cost of your finance loan, which gets added to your monthly repayment total.

Your APR gets calculated annually before being divided into the 12 monthly repayments you'd make in that year. Lenders will also add any admin fees to your total monthly repayment plan.

The total amount of the car and the deposit you have available to pay upfront will determine the amount you wish to borrow and therefore, the overall cost of APR required to pay. 

For example, if you wanted to borrow £20,000 over four years with a 5% APR, your lender would work out 5% of £20,000 and add that figure to the amount you are borrowing to get repaid across 48 months.

In this case, to pay off the £20,000 loan, your original monthly repayments would be 48 instalments of £416.66. 5% of £20,000 is £1,000, spread across 48 months would be £20.83, which would then be added on to your original monthly repayment fee of £416.66, giving you a total monthly fee of £437.49.

While it's easy to get confused, APR and interest rates are technically classed as different things because an interest rate can also mean the amount of money you earn on top of money you put into a savings account.

What is representative APR?

APR is largely determined by an individual's credit history. Not everyone will have the same credit when applying for car finance, meaning people could be offered better or worse APR based on their report.

Because of this, it makes it difficult for a lender to advertise offers for their loans. They only know a person's credit history when they make a finance application.

Representative APR makes credit lending easier for both the lender and the borrower. They look at the lowest APR they would be prepared to offer to 51% of people applying for a loan.

The other 49% of people will get offered a different amount, which is typically because their credit score is lower than those getting the representative amount.

For example, if a lender is offering a loan with an APR of 7.5%, that will mean that 51% of people - generally those with better credit scores - will be getting their loan at this rate, while the other 49% of people should expect it to be higher.

It can, therefore, be quite frustrating for those with lower scores who think they could get a lower APR, but actually, they're looking at the representative figure that doesn't apply to them.

What is real APR?

Real APR is the actual amount of APR you can expect to repay on your loan rather than the representative rate you would have seen advertised when you made your application.

The lender will calculate your real APR based on your credit history, current financial situation, and any red flags that may be visible on your credit report.

Once they have factored in all of this information, they can provide you with the real APR you should expect to repay on top of the amount borrowed.

The better your credit report, the more likely you will get offered a better APR, and therefore, the less money you will have to repay throughout the agreement.

What is exact APR?

Exact APR is what it says on the tin - it's the exact APR you saw when applying for the loan you can expect to repay when you have signed your contract.

Lenders will view your credit report and current financial situation to determine an exact APR. It can often be higher than representative, but it's generally more accurate, so you can budget accordingly.

There'll be no hidden fees either, meaning that you can make your repayments knowing that you will not be expected or asked to pay more than stated.

APR and credit history

If you want to make a finance application, credit lenders will look at your credit history to determine whether they can lend you the money. It's here where they will also decide what APR you would get.

This check is also known as a 'soft search'; while they can access information within your report, it will not show up. A 'hard search' is when lenders obtain further information, which is also visible to other lenders.