What Does a Representative APR Mean in Car Finance?

When reading about car finance,  you may have encountered terms like hire purchase, balloon payment, and annual percentage rate, or APR, amongst others. Here, we’ll be focusing on APR, and specifically, we’ll be answering the question “what is representative APR in car finance?” By having a good grasp of what it means, you’ll be able to compare car finance deals more easily. Let’s begin!

What is an Annual Percentage Rate (APR)?

In essence, the annual percentage rate of a car finance deal is the total cost of your loan. When you get car finance, you’re borrowing money from a lender so you can purchase a car. The APR then is added to the total amount you borrowed. Since it’s called an annual percentage rate, it’s calculated yearly, meaning it’s then divided over 12 months and then added to the monthly repayment amount. 

When car finance companies calculate the APR, they include the interest rate and other fees and charges like the administration fee for processing the car finance agreement. Every lender calculates their APR in the same way and that is why it's a good figure to use when comparing loans from different companies.

There are a number of factors that can affect the annual percentage rate that the lender will offer you. One of the major factors is how much you want to borrow. For example, some lenders might reduce their APR if you loan a bigger amount from them. Also the term over which you want to borrow and your own credit score can affect the APR offered. 

What is Representative APR in Car Finance?

Each borrower is going to have a unique credit profile, that’s why lenders need to assess each car finance application thoroughly before offering a certain APR. This is why lenders find it challenging to advertise their car finance deals and offers. They will not be able to give individuals an accurate APR without evaluating their credit history, credit rating, and financial situation first. This is where representative APR in car finance comes in. 

When a loan is advertised with a representative APR, it means that at least 51% of customers receive a rate that is the same as, or lower than, the representative APR. That’s why whenever you see an ad for a car finance deal offering a 12% representative APR, it’s meant to apply to 51% of the accepted borrowers for that deal. So, what happens to the other 49%? The rest of the borrowers will most likely have higher APRs because of low credit scores. Note that the representative APR does not account for how many car finance applications will be rejected. 

Many people seeing a car finance ad will assume that the representative APR is the exact rate that will be applied to their loan. However, as we now know, the representative APR doesn’t guarantee that, because the lender still needs to evaluate your credit history and financial situation. You will know your real APR once you’ve gone through the process of actually applying for car finance and the agreement has been finalised. 

What is a Real Annual Percentage Rate?

As the name suggests, a real APR is the actual interest rate that will be applied to your loan. It is not the one that has been advertised by the lender. Your real APR has been calculated by the car finance company, basing it on whether you’re a low-risk or high-risk borrower. Lenders decide on this by looking into your credit history, financial situation, and whether you’ve been a good payer in previous loans or if you’ve been in arrears

That’s why it’s important to have a good credit history before you apply for car finance or any financial products. You want the lender to see that you’re a responsible borrower who makes payments on time, every time. If you’re a low-risk borrower, it will be easier for your car finance application to be approved and you’ll most likely get a low annual percentage rate on your loan. 

Exact APR vs. Representative APR

If you’ve also seen the term “exact APR,” you might be a bit confused about what it means. Is it the same with real APR? How is it different from a representative APR? An exact APR is the APR that you’ll get once the car finance agreement has been finalised. It’s tailored specifically to your credit score, history, and financial situation. 

Unless you are confident that you have a very good credit score, expect the exact APR to be higher than most representative APRs that lenders advertised. What’s good about it though is that it’s more accurate than representative APRs. When you know the exact APR, it will be easier for you to plan your finances and assess whether you can afford the monthly repayments. 

But how can I get an exact APR? You might be asking this question. The car finance company can conduct a soft search on your credit history so they can give you an exact APR. Don’t worry that the soft search will be recorded in your credit report because it won’t. You can request a number of car finance quotes from different lenders without them impacting your credit score and ability to secure credit.

What is 0% Representative APR in Car Finance?

You may have also seen some ads on car finance deals that offer 0% representative APR. What does this mean exactly? If the lender advertised this, then it means they won’t apply any administration fees or interest. The loan is effectively free of charge. 

You might be wondering how will they earn a profit, and is there a catch, right? In many cases, the fees and interests will be added to the actual amount you’ll pay for the car. It often applies to only certain models of new cars which the dealer needs to sell - and the price you pay might be higher, and also a new car will depreciate much more quickly too. Before choosing a 0% APR car finance deal, be sure to read the fine print because you might end up paying more in the long run. 


Now you should have a good idea of what representative APR means in car finance. Along with that, you also know the differences between that and exact APR and real APR. Hopefully, this will help you in comparing various car finance deals so you can find one that best suit your financial situation.  

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