6 min read

Find out how much a loan will cost you with our guaranteed rates

Frankie Jones
30 September 2019

If you’re thinking of applying for a loan, the APR (annual percentage rate) is probably one of the first things you'll look at, as it affects how much the loan will cost you overall.

But why is the advertised APR usually called 'representative'? How is this different from the real (or ‘guaranteed’) APR? And - more importantly - does this mean the real APR will be higher than the advertised rate?

To make things more transparent for you, we're diving into the differences between representative and real APRs in this article to help you get the best deal.

Firstly, what is APR?

The APR is basically the total cost of a loan.

It’s made up of:

  • the interest rate (%) you have to pay each year
  • any other upfront fees charged by the lender each year

Here's an example:

Let’s say you borrowed £2,000 at 10% APR for 5 years. If 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 plus £200 in interest. (Of course, lenders usually require regular monthly repayments, which means the amount you owe in interest wouldn’t be exactly £200).

Nonetheless, the APR has a big influence on how much you have to pay back overall.

What’s the difference between ‘representative’ and ‘real’ APR?

While it would be helpful to see the real APR you’ll be offered when searching for a loan, sadly this isn’t always possible. This is because the real APR you’ll be offered depends on your individual circumstances, which lenders don’t know until you’ve applied and they can see your credit report.

So lenders use an average rate, which is known as the representative (or ‘rep’) APR. Lenders can only advertise an APR as representative if 51% of people who apply for that loan are guaranteed to receive that rate or a lower one. This stops lenders advertising completely unrealistic APRs that very few people will actually get.

A real APR, on the other hand, is the rate you’ll actually get if you’re accepted for the loan. 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, such as your current financial situation, credit history and any previous dealings with them.

What's the difference in cost?

Let's say you're looking to take out a £5,000 loan over 36 months. We found that ClearScore users with a credit score of less than 250 were, on average, offered a representative APR of 49%. But the real APR they received was 63%, which meant they'd end up repaying an extra £1,554.65 on top of their loan.

But for the same loan and term, users with a score of between 550 and 700 were offered a representative APR of 12%. On average, the real APR they ended up with was 14%, meaning they’d have to repay an extra £192.90 on top of the £5,000 loan.

So not only does your credit score affect the APR you'll get, but the difference between the advertised and real APR could end up costing you a small fortune.

See your real APR with ClearScore

Applying for credit can be a bit of a catch 22. Since you won’t know the real APR until after you’ve made a full credit application, and making multiple applications for credit can harm your credit score, it can leave you in the dark.

To try and solve this problem for users, we’ve partnered with credit providers to show your real APR before you apply. Knowing what rate you’ll be offered from the get-go means you can calculate the full cost of your loan so you know how much you’ll need for repayments.

We use ‘soft searches’ to match financial products to your unique credit profile. Using your credit report information and borrowing history, we’re able to handpick the right loans for you and rank them in order of suitability (we never rank based on commission). This clever algorithm is designed to save you time and money; we know how frustrating it is searching various price comparison sites with no idea how much a loan will actually cost you.

At the moment, not all of our lenders are able to disclose your real APR before you apply, though we’re adding more all the time. So we tend to rank your products starting with those that can show a guaranteed rate (unless we think they’ll actually work out more expensive for you overall, compared to a product with a lower, but only representative, rate).

If you're looking for a loan, why not check your ClearScore offers and see how much you could save? See your real APR next to the products listed in your offers section, along with the label 'guaranteed rate'.

In a nutshell:
  • The APR is the overall cost of the loan or credit card. Lenders have to show it on all marketing materials to make comparisons between products easier.
  • Most lenders use a ‘representative’ APR when advertising credit products. In order to show this APR, at least 51% of their customers must be guaranteed to receive this rate.
  • The actual APR you’ll be offered (the ‘real’ APR) will depend on your financial circumstances and credit history. Most of the time, you won’t know this until after you’ve applied.
  • We’re working with partners to bring you guaranteed rates, so you know what you’ll get before you apply. Look out for a ‘guaranteed rate’ next to an offer.
by Frankie Jones

Frankie Jones is ClearScore's in-house Copywriter. 

ClearScore exists to make your finances simple.
We offer a free service where you can handle everything to do with credit in one place. In your ClearScore account, you can see your credit score and the full details of your credit report. Your credit cards, mortgages, mobile phone contracts, loans, overdrafts and utilities all on the record. Our goal is to make ClearScore as simple, calm and straightforward as possible. Money is stressful enough.