What does representative APR rate mean?


What does representative APR rate mean?

There’s a lot of jargon involved with banking and credit, so it’s understandable if you get confused about what means what. But, it’s a good idea to try and familiarise yourself with these terms and abbreviations to make sure you know what you’re agreeing to. Luckily, we’re here to help you get to grips with some of these terms – like ‘representative APR rate’.

Breaking it down

Put simply, APR stands for ‘annual percentage rate’. You’ll usually find it on products where you borrow money - such as loans, mortgages and credit cards.

If a product has a ‘representative APR rate’, it just means the yearly rate at which lenders may charge you for borrowing. It has to be displayed by lenders, as it allows you to compare other products easily and fairly.

The ‘representative’ is based on the rate the lender would reasonably expect 51% of customers responding to and taking out the loan or credit card to receive.

For example, if you were to borrow £100 with an APR rate of 10%, you would have to pay £10 – as well as repaying the £100 you borrowed. If you borrowed £100 with an APR of 20%, you would repay £120, and so on. So - typically - the higher the APR rate, the more it will cost you to borrow.

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Low representative APR rates

There are all sorts of different representative APR rates on the market for credit cards and loans – and they range a lot in size.

Applying for those with the lowest rates would seem logical due to lower interest charges - but, to qualify you normally need an excellent credit score. Meanwhile, those with a higher APR might not seem as attractive, but they are often more accessible to a wider range of people.

Those with a good credit rating should be able to take advantage of these loans and credit cards. Alongside this, many low APR credit cards may also offer rewards such as cashback on purchases, air miles, supermarket reward points and interest-free periods.

As these offers can sometimes be exclusive to those with excellent credit scores – dependent on the terms and conditions set out by a lender - it’s a wise idea to avoid applying if you have a low credit score as you could be rejected. Being rejected for credit could also harm your credit rating further.

Applying for certain types of credit - such as a mortgage or personal loan - can leave a ‘hard footprint’ on your credit score. If you are then declined by a lender, the hard footprint remains, so should you continue to be rejected, other lenders may view you as desperate and refuse your application.

Checking your credit score online or getting an insurance quote are examples of situations where you would receive a ‘soft footprint’ on your credit score. These are less likely to affect your chances of borrowing, but should still only be carried out when you really need to.

If you want to know more about your credit rating, websites such as Experian and Equifax can carry out checks and provide you with more information.

High representative APR rates

While many lenders will offer loans and credit cards with low APR rates, there are also plenty of products on the market with higher rates. Products like this are sometimes aimed at people with a low credit score.

Those with a bad credit history may be attracted to these cards as they can’t get more competitive rates elsewhere. While they can be a helpful lifeline to some borrowers, it’s never a good idea to take on more credit if you have struggled with it in the past. You should try to borrow responsibly and only consider it if you know you can comfortably make the repayments.

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