Representative APR or Annual Percentage Rate refers to the interest rate plus charges that are typically added to a credit agreement such as a mortgage, loan or credit card. As an integral part of UK consumer credit legislation, banks and lending companies are required to clearly specify their respective loan interest rates as well as other charges levied for obtaining finance.With representative APR, the companies involved are obliged to state comprehensively, in ways that any ordinary borrower can understand, how specifically these rates are applied to any credit obtained. This also includes presenting clearly other costs added to a loan i.e. any associated fees and service charges that are automatically included during the course of the agreement.
This directive helps the borrower to grasp a clearer understanding of the details and charges involved in any loan agreement. This therefore allows the consumer to become more informed before arriving at any decision relating to borrowing. Additionally, the borrower can gain an idea of the overall cost of any loan or credit that he may apply for.
The borrower can then use this information to make comparisons with various loans and credit offers. This will help him to decide which loan interest rates will be most suitable for him and his current financial circumstances. Lending banks and lending companies have to make their APR clearly understood before any agreement is signed and initiated.
Representative APR Explained
All lending institutions, when advertising their products and services, have to prominently indicate their rates. The representative APR is the displayed rate that will be implemented to at least 51 percent of approved applicants. This means that up to 49% of those applicants might receive a different rate, which may be higher.
According to UK regulations any company that advertises its cost of borrowing or its interest rate, must also include a representative APR example. Additionally, there are certain items that must be included in this example. These are: the rate of interest per annum and whether it is fixed or variable, the amount borrowed and the total cost of credit.
There are some things to be aware of when it comes to APR. Firstly, since 51 percent of approved loan applicants will be granted the advertised interest rate, you may fall within the remaining 49% who have to pay a different rate. This can sometimes be higher. However, some companies will try to stay below the advertised APR, so this is something to look out for as it may be beneficial to you.
Secondly, changes in rates can affect the amount that you have to repay over the duration of the credit agreement. However, this is mainly the case with mortgages and credit cards. Loans, on the other hand, usually only have one figure relating to the APR, which means that it should stay the same throughout the duration of the loan.
Finally, APRs only specify mandatory charges and fees. Some lending institutions will automatically add payment protection insurance (PPI) once a loan is approved. Although this is not compulsory, you need to specifically indicate that you are opting out of this added cost if it is not required. It will help you to read the credit agreement thoroughly so that you understand the advantages and disadvantages of adding PPI cover.