When you’re shopping around for credit, you’ll probably notice you’re always shown the advertised or ‘representative’ APR (annual percentage rate). But have you ever wondered why you can’t just be told what APR you’ll be offered before you apply?
If you’re thinking of applying for credit, the APR - or interest rate — is probably one of the first things you'll look at. Interest is the price of credit. So it makes sense to look for a product with the lowest APR possible.
But why is the advertised APR usually called “representative” or “typical”? How is this different from the real (‘guaranteed’) APR? And, more importantly, does this mean the real APR will be higher than the advertised rate?
What is an APR?
APR stands for annual percentage rate. It consists of:
the percentage rate of interest you have to pay each year
any other upfront charges due to your lender during that year
Put another way, the APR is the overall cost of your loan.
Here's an example:
Let’s say you borrowed £2,000 at 10% APR for 5 years. During the first year, you don’t pay anything back. At the end of the first year, you’d owe your lender £2,200 — the £2,000 you borrowed and £200 in interest.
Of course, lenders usually require regular monthly repayments. Which means you’ll pay slightly less than the £200 in our example. Nonetheless, the APR has a big influence on how much you’ll have to pay back overall.
Why is the advertised APR only “representative” or “typical”?
The Financial Conduct Authority (FCA) requires all lenders to display a product’s APR on adverts and other marketing materials. The reason is simple: it makes it easier for customers to compare products on a like-for-like basis.
However, lenders don’t tend to display the actual APR you’ll get offered, because it depends on your individual circumstances. And without any information about your credit history or financial situation, it’s hard to work out an accurate rate upfront.
So, lenders use an average rate: the “representative” or “typical” APR.
How is a representative APR worked out?
The FCA has very specific (and rather complicated) rules on calculating representative APRs. But here’s the bottom line: lenders can only advertise an APR as “representative” or “typical” if 51% of their customers get that rate or lower. This means lenders can't advertise interest rates that barely anyone can get.
If you’re not in the 51% of customers who get offered this rate, it’s a little unclear how exactly your APR will be worked out, and how much higher it might be than the advertised rate.
What’s 'real' APR?
The ‘real’ APR is the interest rate you will actually have to pay - rather than just the advertised or representative rate. This is calculated by the lender, based on how ‘risky’ a borrower they think you might be. They make this decision based on a range of information including the following:
- your current financial situation
- your credit history
- any past dealings you’ve had with the lender
The better your credit score and credit history looks, and the more stable you appear to a lender. This means it's more likely it is you’ll be viewed as ‘low risk’ and therefore accepted for credit for the lowest APR.
Applying for credit can be a bit of a catch 22
Usually, you won’t know the ‘real’ APR until after you’ve made a full credit application. If you’re in the 51% who apply for a product and are eligible for the advertised APR, you won’t know for sure until you get a response to your application. And since making multiple applications for credit can harm your credit score, it leaves many of us in a bit of a catch 22.
So what can you do if you want to know exactly what you’ll pay before you apply?
Find out your real APR, with ClearScore
To try and solve this catch 22 for users, ClearScore have partnered with several credit providers who can show you your real APR before you apply. This appears next to products listed on the ‘Offers’ section of your ClearScore with the label 'guaranteed rate'.
We’re able to work with lenders to do this because we use ‘soft searches’ to match financial products to your credit profile.
Soft searches are like a preliminary credit check. It means lenders can see some credit information on you, but not your full credit report. This information can be used to calculate the actual APR you’ll be asked to pay. And most importantly, soft searches won’t affect your credit score in any way.
At the moment, not all of the lenders we partner with are able to show you your real APR. So we tend to order your products to show ones with your real APR - or “guaranteed rate” – first, because what you see is what you’ll get. (Unless we think they’ll actually work out much more expensive for you overall, compared to a product with a lower, but only representative, rate). Products with a representative APR appear lower down your list. Most of these will still show your personal eligibility score - that is the likelihood you’ll be accepted - next to each offer.