You will often see the acronym ‘APR’ used in car advertising. It stands for ‘Annual Percentage Rate’ – in other words, the total cost of borrowing a certain amount of money for 12 months.
The APR includes the interest you will pay on the car finance, along with any fees associated with the borrowing.
Let’s say 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 of money 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 type of car you choose, plus any special offers available. In recent times, higher interest rates have made finance less affordable – not only for cars, but also for mortgages and other types of loans.
Representative APR explained
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 may 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 altogether.
The rate could potentially be higher than advertised, which means borrowing could be more expensive than the example presented in the advertisement. As explained 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 will pay when borrowing. If a car is advertised with an exact rate of three percent, that’s the rate you will be offered. So you know the exact amount you have to repay.
Need more help? This quick video from Volkswagen explains representative APR in a nutshell.
Always treat representative rates as a guide only. And ensure you know exactly how much you’ll have to pay each month before you sign the paperwork.
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