What does APR mean?

Hannah Scott, Head of Structured Lending, Monday, 20 June 2022
Updated: Monday, 26 February 2024

Whether you’re applying for a mortgage, paying for something on a credit card, or buying a car on finance, understanding APR is important if you’re looking to borrow money.

In this guide, we’ll explain what APR is, when it’s used, what the difference is between ‘representative APR’ and ‘personal APR’, and how it can affect you if you are looking for vehicle finance.

In this guide

Whether you’re applying for a mortgage, paying for something on a credit card, or buying a car on finance, understanding APR is important if you’re looking to borrow money.

In this guide, we’ll explain what APR is, when it’s used, what the difference is between ‘representative APR’ and ‘personal APR’, and how it can affect you if you are looking for vehicle finance.

In this guide

Summary: the higher your APR, the more expensive it will be to borrow money. If you have bad credit, you may find that you are offered a higher APR. Whereas if you have good credit, you may be offered a lower APR, depending on your circumstances. Your APR determines how much you will pay over the course of a finance agreement, so it’s important to understand how it works and what it means for you.

Summary: the higher your APR, the more expensive it will be to borrow money. If you have bad credit, you may find that you are offered a higher APR. Whereas if you have good credit, you may be offered a lower APR, depending on your circumstances. Your APR determines how much you will pay over the course of a finance agreement, so it’s important to understand how it works and what it means for you.

What is APR?

APR stands for ‘Annual Percentage Rate’. It is a way of saying what the annual cost of borrowing money is. APRs vary by product, lender, and person, so it’s important that you understand the APR offered to you before signing a finance agreement.

The APR is given as a percentage to make it clearer for borrowers to compare finance offers. APR also determines the total amount you will owe over the course of the agreed repayment period.

APR represents the total cost of credit, including the monthly interest rate and any other fees or charges set out by the lender.

What is APR?

APR stands for ‘Annual Percentage Rate’. It is a way of saying what the annual cost of borrowing money is. APRs vary by product, lender, and person, so it’s important that you understand the APR offered to you before signing a finance agreement.

The APR is given as a percentage to make it clearer for borrowers to compare finance offers. APR also determines the total amount you will owe over the course of the agreed repayment period.

APR represents the total cost of credit, including the monthly interest rate and any other fees or charges set out by the lender.

Representative APR vs Personal APR: what are the differences?

Representative APR

Representative APR means that at least 51% of customers receive a rate that is the same as or lower than the representative APR. You could use this to compare lenders against each other.

You might have heard it shortened to ‘rep APR’, but this means the same thing.

For example, our representative APR for car and van finance is 30.5%, and 35.5% for motorbike finance. This means that at least 51% of our customers’ finance agreements have that interest rate or lower.

It’s important to know that a lender’s representative APR isn’t always what you will be offered. For example, if you have a ‘good’ or ‘excellent’ credit score, you may be offered a lower APR than someone with a ‘poor’ or ‘fair’ credit score, depending on your circumstances.

A lender’s representative APR is an example figure and not a guarantee of the actual rate you will be given when entering into a finance agreement. By checking a lender’s representative APR, customers can evaluate their borrowing options before deciding on the one that’s right for them.

Personal APR

So, the representative APR is the advertised rate that at least 51% of customers get. Personal APR is the interest rate you’re actually given on a finance agreement. This could be the same as the representative APR, or higher, or lower, depending on your circumstances.

When you make an application, we look at a variety of factors to make sure you’re eligible and to understand your creditworthiness.

Your personal APR is determined by several factors, including:

  • Your income
  • Your credit history
  • Your credit utilisation
  • How much debt you currently have
  • Whether you’ve defaulted on credit in the past
  • If you have any missed or late payments

If you decide to get finance with us, your personal APR could be between 17.5% and 49.9%.

How does APR work with vehicle finance?

When you use our car finance calculator, it will give you an idea of how much your monthly repayments could be and how much you will repay in total. It calculates this depending on how much you are looking to borrow, for how long, and what your credit score is.

It’s easier to understand how APR works by using an example:

  • A person with a ‘fair’ credit score
  • That wants to borrow £12,000 for a vehicle
  • With a repayment period of 55 months
  • They are offered a personal APR of 33.5%

Calculated APR: 33.5%

Monthly payment: £401.96

Total to repay: £21,705.84

Cost of credit: £9,705.84

It also doesn’t include any additional charges that may be incurred throughout your finance agreement.

Additional charges may occur for a variety of reasons, but we can’t speak for other lenders, and everyone’s finance agreement is different. If you aren’t sure of what extra charges exist, check your contract, or speak to the lender.

Some common reasons for additional charges in a vehicle finance agreement include:

  • Missed or late repayments
  • Exceeding mileage restrictions
  • Repairs needed to fix a returned vehicle to a reasonable condition
  • Termination of your agreement and collection of the vehicle

How do I find out what my personal APR is?

The personal APR you are offered depends on your circumstances, so you won’t know for sure what your APR will be until you have gone through the application process and provided all the relevant information.

Our online calculator will only be able to give you an estimate of the APR you might be offered. You will need to make an application to be given your personal APR and an accurate calculation of the monthly repayments needed.

What affects the APR that someone is offered?

Annual percentage rates vary from person to person due to several factors. Lenders consider creditworthiness on a case-by-case basis, using factors such as credit score, repayment history, income, and current debt. These factors help lenders assess the risk of lending to a particular borrower.

If you’ve missed payments in the past or had a CCJ, IVA, DMP, or other kind of financial difficulty, you might have poor credit. This doesn’t make it impossible to get finance.

There is a lender out there for everyone, regardless of your credit score. Having a poor credit score doesn’t mean you won’t be able to buy a car on finance, it just means that you may be offered a higher APR than if you had good credit.

You can check to see if you have a good or bad credit score and what affects your credit score before applying, so that you have an idea of what kind of APR you could be offered.

Everyone’s eligibility for vehicle finance is different, but people with a good credit score may be offered a more favourable APR. For this reason, you may wish to check and improve your credit score so that you can prove to potential lenders that you are a reliable borrower.

If lenders see you as a reliable borrower based on your credit report and other factors, you may be offered a lower APR.

What affects your monthly payments other than APR?

It’s important to understand all the terms of the finance agreement you may be entering into before making an application. Vehicle finance is a type of secured credit, this means that failure to keep up with the terms of your finance agreement could mean your vehicle is repossessed.

Other than APR, several factors can affect the size of your monthly payments. These include:

The annual interest rate

The amount you pay each month will depend mainly on the interest rate used to calculate your APR.

Whenever you take out a loan or finance agreement, it’s important to check whether or not the interest rate used to calculate your repayments is fixed or variable. A variable interest rate would mean a variable APR is used, meaning your monthly payments could change throughout the life of your agreement.

Our vehicle finance uses a fixed interest rate. This means that your monthly payments stay the same throughout your agreement. Other lenders and other financial products might use a variable interest rate so make sure you understand which type of interest they use before making an application.

The length of the repayment period

The repayment period is the number of weeks, months, or years that the finance agreement lasts for. If you choose to repay everything over a short period of time, the amount you will owe each month will be greater than if you choose to repay over a longer term.

For example, let’s say person A borrows £12,000 from us over 36 months, and person B borrows the same amount of money (£12,000) over 50 months. Both of them have a ‘fair’ credit score and an APR of 33.5%.

Example Monthly payment Total to repay
Person A (36 months) £513.53 £17,973.55
Person B (55 months) £401.96 £21,705.84

Notice how Person B’s monthly payment is £111.57 lower than Person A. They’ve spread the cost over a longer period of time, so their monthly payment is lower. However, Person B’s total to repay is higher than Person A’s.

This is because, the longer an agreement lasts, the more that is charged in interest. That’s why it’s important to consider the length of the repayment period and understand how a longer or shorter agreement might affect your payments.

The amount you're borrowing

The size of the loan you are taking out can impact the amount you need to repay each month.

For example, Person C borrows £10,000 over 36 months. Person D borrows £15,000 over the same time period (36 months). Both of them have a ‘fair’ credit score and an APR of 33.5%.

Example Monthly payment Total to repay
Person C (£10,000) £427.94 £14,977.90
Person D (£15,000) £641.91 £22,466.85

Because Person D is borrowing more money over the same period of time, their monthly payments are £213.97 higher than Person C.

It’s important to also consider how much you’d like to borrow because this will affect the size of your monthly repayments as well.

The size of your deposit

We understand that it may be hard to save a deposit for car finance. Getting a vehicle with no deposit means that you borrow more money, which means you will pay back more over the duration of your finance agreement.

By putting down a deposit, you would borrow less. This could mean you pay less compared to someone over the same agreement period who doesn’t put down a deposit.

FAQs about APR

Although they are related, the Annual Percentage Rate and interest rate associated with a finance agreement are not the same things. The interest rate represents the cost of borrowing funds, expressed as a percentage of the loan amount.

APR encompasses both the interest rate and other costs associated with the loan, such as additional fees or costs incurred as part of the agreement. APR provides a more comprehensive view of the total cost of borrowing, and you could use it to compare lenders to each other.

APR is the annual rate of interest paid on loans and credit products such as car finance combined with any other fees that the person borrowing is charged.

Annual Equivalent Rate (AER) is usually used in savings accounts and explains what rate of interest you will earn depending on how often interest is added to your account.

Both APR and AER are helpful comparison tools for borrowers evaluating the offers available from different lenders.

The lower your APR, the less interest you’ll pay compared to someone with a higher APR. The personal APR you are offered depends on your circumstances, so it’s difficult to say what a ‘good’ APR is, because everyone’s finance agreement is different.

You might be wondering how you could get a lower APR in the future. Repaying your bills on time and in full can help show future lenders that you are responsible with credit. Other things that might improve your credit score, which could improve your eligibility for credit, include:

  • Being on the electoral roll
  • Checking your credit report and ensuring there are no mistakes or errors
  • Applying for a ‘notice of disassociation’ if you are no longer financially linked to someone

Representative APR vs Personal APR: what are the differences?

Representative APR

Representative APR means that at least 51% of customers receive a rate that is the same as or lower than the representative APR. You could use this to compare lenders against each other.

You might have heard it shortened to ‘rep APR’, but this means the same thing.

For example, our representative APR for car and van finance is 30.5%, and 35.5% for motorbike finance. This means that at least 51% of our customers’ finance agreements have that interest rate or lower.

It’s important to know that a lender’s representative APR isn’t always what you will be offered. For example, if you have a ‘good’ or ‘excellent’ credit score, you may be offered a lower APR than someone with a ‘poor’ or ‘fair’ credit score, depending on your circumstances.

A lender’s representative APR is an example figure and not a guarantee of the actual rate you will be given when entering into a finance agreement. By checking a lender’s representative APR, customers can evaluate their borrowing options before deciding on the one that’s right for them.

Personal APR

So, the representative APR is the advertised rate that at least 51% of customers get. Personal APR is the interest rate you’re actually given on a finance agreement. This could be the same as the representative APR, or higher, or lower, depending on your circumstances.

When you make an application, we look at a variety of factors to make sure you’re eligible and to understand your creditworthiness.

Your personal APR is determined by several factors, including:

  • Your income
  • Your credit history
  • Your credit utilisation
  • How much debt you currently have
  • Whether you’ve defaulted on credit in the past
  • If you have any missed or late payments

If you decide to get finance with us, your personal APR could be between 17.5% and 49.9%.

How does APR work with vehicle finance?

When you use our car finance calculator, it will give you an idea of how much your monthly repayments could be and how much you will repay in total. It calculates this depending on how much you are looking to borrow, for how long, and what your credit score is.

It’s easier to understand how APR works by using an example:

  • A person with a ‘fair’ credit score
  • That wants to borrow £12,000 for a vehicle
  • With a repayment period of 55 months
  • They are offered a personal APR of 33.5%

Calculated APR: 33.5%

Monthly payment: £401.96

Total to repay: £21,705.84

Cost of credit: £9,705.84

It also doesn’t include any additional charges that may be incurred throughout your finance agreement.

Additional charges may occur for a variety of reasons, but we can’t speak for other lenders, and everyone’s finance agreement is different. If you aren’t sure of what extra charges exist, check your contract, or speak to the lender.

Some common reasons for additional charges in a vehicle finance agreement include:

  • Missed or late repayments
  • Exceeding mileage restrictions
  • Repairs needed to fix a returned vehicle to a reasonable condition
  • Termination of your agreement and collection of the vehicle

How do I find out what my personal APR is?

The personal APR you are offered depends on your circumstances, so you won’t know for sure what your APR will be until you have gone through the application process and provided all the relevant information.

Our online calculator will only be able to give you an estimate of the APR you might be offered. You will need to make an application to be given your personal APR and an accurate calculation of the monthly repayments needed.

What affects the APR that someone is offered?

Annual percentage rates vary from person to person due to several factors. Lenders consider creditworthiness on a case-by-case basis, using factors such as credit score, repayment history, income, and current debt. These factors help lenders assess the risk of lending to a particular borrower.

If you’ve missed payments in the past or had a CCJ, IVA, DMP, or other kind of financial difficulty, you might have poor credit. This doesn’t make it impossible to get finance.

There is a lender out there for everyone, regardless of your credit score. Having a poor credit score doesn’t mean you won’t be able to buy a car on finance, it just means that you may be offered a higher APR than if you had good credit.

You can check to see if you have a good or bad credit score and what affects your credit score before applying, so that you have an idea of what kind of APR you could be offered.

Everyone’s eligibility for vehicle finance is different, but people with a good credit score may be offered a more favourable APR. For this reason, you may wish to check and improve your credit score so that you can prove to potential lenders that you are a reliable borrower.

If lenders see you as a reliable borrower based on your credit report and other factors, you may be offered a lower APR.

What affects your monthly payments other than APR?

It’s important to understand all the terms of the finance agreement you may be entering into before making an application. Vehicle finance is a type of secured credit, this means that failure to keep up with the terms of your finance agreement could mean your vehicle is repossessed.

Other than APR, several factors can affect the size of your monthly payments. These include:

The annual interest rate

The amount you pay each month will depend mainly on the interest rate used to calculate your APR.

Whenever you take out a loan or finance agreement, it’s important to check whether or not the interest rate used to calculate your repayments is fixed or variable. A variable interest rate would mean a variable APR is used, meaning your monthly payments could change throughout the life of your agreement.

Our vehicle finance uses a fixed interest rate. This means that your monthly payments stay the same throughout your agreement. Other lenders and other financial products might use a variable interest rate so make sure you understand which type of interest they use before making an application.

The length of the repayment period

The repayment period is the number of weeks, months, or years that the finance agreement lasts for. If you choose to repay everything over a short period of time, the amount you will owe each month will be greater than if you choose to repay over a longer term.

For example, let’s say person A borrows £12,000 from us over 36 months, and person B borrows the same amount of money (£12,000) over 50 months. Both of them have a ‘fair’ credit score and an APR of 33.5%.

Example Monthly payment Total to repay
Person A (36 months) £513.53 £17,973.55
Person B (55 months) £401.96 £21,705.84

Notice how Person B’s monthly payment is £111.57 lower than Person A. They’ve spread the cost over a longer period of time, so their monthly payment is lower. However, Person B’s total to repay is higher than Person A’s.

This is because, the longer an agreement lasts, the more that is charged in interest. That’s why it’s important to consider the length of the repayment period and understand how a longer or shorter agreement might affect your payments.

The amount you're borrowing

The size of the loan you are taking out can impact the amount you need to repay each month.

For example, Person C borrows £10,000 over 36 months. Person D borrows £15,000 over the same time period (36 months). Both of them have a ‘fair’ credit score and an APR of 33.5%.

Example Monthly payment Total to repay
Person C (£10,000) £427.94 £14,977.90
Person D (£15,000) £641.91 £22,466.85

Because Person D is borrowing more money over the same period of time, their monthly payments are £213.97 higher than Person C.

It’s important to also consider how much you’d like to borrow because this will affect the size of your monthly repayments as well.

The size of your deposit

We understand that it may be hard to save a deposit for car finance. Getting a vehicle with no deposit means that you borrow more money, which means you will pay back more over the duration of your finance agreement.

By putting down a deposit, you would borrow less. This could mean you pay less compared to someone over the same agreement period who doesn’t put down a deposit.

FAQs about APR

Although they are related, the Annual Percentage Rate and interest rate associated with a finance agreement are not the same things. The interest rate represents the cost of borrowing funds, expressed as a percentage of the loan amount.

APR encompasses both the interest rate and other costs associated with the loan, such as additional fees or costs incurred as part of the agreement. APR provides a more comprehensive view of the total cost of borrowing, and you could use it to compare lenders to each other.

APR is the annual rate of interest paid on loans and credit products such as car finance combined with any other fees that the person borrowing is charged.

Annual Equivalent Rate (AER) is usually used in savings accounts and explains what rate of interest you will earn depending on how often interest is added to your account.

Both APR and AER are helpful comparison tools for borrowers evaluating the offers available from different lenders.

The lower your APR, the less interest you’ll pay compared to someone with a higher APR. The personal APR you are offered depends on your circumstances, so it’s difficult to say what a ‘good’ APR is, because everyone’s finance agreement is different.

You might be wondering how you could get a lower APR in the future. Repaying your bills on time and in full can help show future lenders that you are responsible with credit. Other things that might improve your credit score, which could improve your eligibility for credit, include:

  • Being on the electoral roll
  • Checking your credit report and ensuring there are no mistakes or errors
  • Applying for a ‘notice of disassociation’ if you are no longer financially linked to someone
 
Hannah Scott, Head of Structured Lending
Bringing you guides that simplify the complex world of credit.
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