A Complete Guide to APR

When you buy a car on finance, you’re bound to come across lots of different terminology and initialisms. For instance, you may encounter things like ‘PCP’ or ‘HP’, and not be sure what they stand for (Personal Contract Purchase and Hire Purchase respectively).

Another one of these initialisms is APR, which is the Annual Percentage Rate you’ll be charged. But knowing what the term means, and understanding how APR works are two rather different things!

To help you get a better understanding of APR, we’ve explored the topic in more detail below:

What is APR?

If you’ve ever taken out credit before, you’ll have encountered Annual Percentage Rates, even if you’re borrowing money for less than a year. APR is the rate used to show you the cost of borrowing, taking into account the interest, as well as any additional charges applied. Before signing a credit agreement, the lender has to tell you what their APR is.

APR can be useful when you’re comparing different loan or credit card options. Although it doesn’t always tell the whole story, you can use APR as a rough guide as to how much interest you’d be paying. For example, a loan with 12% APR should be cheaper than a personal loan with 15% APR, though other factors may affect the cost.

It should also be noted that APR won’t include any non compulsory charges, such as payment protection. You should therefore carefully read the terms and conditions before confirming any form of credit agreement.

APR Vs Interest Rates

As mentioned above, APR is not the same as the interest rate. You may notice that the interest rate is lower than the APR. This is because this figure does not include things like fees or charges. It’s a representative figure, to give you an idea of how much the cost of borrowing would be each year.

The APR, on the other hand, will be a total annual cost, including any applied fees and the interest you’d accrue prior to your first payment date. It is therefore considered to be a more accurate figure when determining how much you’ll be repaying overall.

What is 0% APR?

You may have come across 0% interest or 0% APR car loans. These often sound a little too good to be true, but they really do exist. With an interest free vehicle loan, you would only have to pay the initial deposit, as well as monthly instalments that cover the amount you borrowed. No interest would be applied. You can get both Hire Purchase (HP) and Personal Contract Purchase (PCP) agreements which offer 0% APR.

The thing to remember with a no interest loan is that the cost of the vehicle itself may be higher. Dealers will still be trying to make a profit, so they may put the vehicles on the market for slightly more money than you’d find elsewhere. A 0% APR loan will often still be cheaper though – you simply need to make sure you do all the calculations before signing the agreement.

What Does Representative APR Mean?

You’ll often come across representative APR, as well as fixed APR. The former is an average interest rate, while the latter would be a rate offered to everyone. With representative APR, lenders will provide the interest rate that they offer to at least 51% of the applicants that have been accepted.

For example, if a lender was offering a representative APR of 12%, this would mean that at least half of all approved applicants would get that interest rate or better. The remaining 49% of approved applicants would be offered a higher interest rate.

The reason for different APR figures is that not everyone will always be offered the same rate. Factors such as your credit rating and the length of your finance agreement will impact the rate you’re offered.

When advertising, lenders must include their representative APR too. They will often have a representative example below this too, to help borrowers understand how the interest rate affects their monthly instalments.

APR on New Car Finance

When it comes to new car finance, manufacturers often offer much lower interest rates. You may be offered rates as low as 2% interest with a new vehicle. As with any dealer offering 0% interest though, it’s essential that you consider the total cost of the loan.

While the interest rate may be significantly lower, if the price of the vehicle is much higher, you’ll probably be repaying more overall. You’ll have to weigh this up against the benefit of owning a brand new vehicle, which presumably will have lower running and maintenance costs.

APR on Used Car Finance

You’re unlikely to find 0% interest on used cars, and the rates may not be as low as with new vehicle finance. But this doesn’t mean that competitive rates aren’t available. The trick is to look at the overall cost of the vehicle, including things like road tax and insurance. These things tend to be cheaper with a newer, more eco-friendly car.

You should also pay more attention to the APR than the interest rate quoted, as this will give you a more accurate picture of the cost of vehicle finance.

Can I Get a Lower APR?

There are a few things you can do in order to get a lower APR. The first is to see if you’re able to improve your credit score. People with a poor credit history will often be offered higher interest rates, so it’s worth looking into this. You might even be able to instantly boost your credit rating through Experian – they look at other regular payments, alongside your credit repayments, to get a clearer understanding of how you manage your money.

Other factors that impact the APR offered include the age of the vehicle. As mentioned above, new cars sometimes even come with 0% interest, though of course the cars themselves will be more expensive to purchase.

The length of your vehicle finance contract can additionally affect the amount of interest you pay. If you take out a longer agreement, this means more time for interest to accrue. So you could be paying back more interest overall, even if the instalments are cheaper.

Overall, there are a lot of different things to consider when it comes to APR and interest rates. If you’re unsure, it can be helpful to speak with third parties, and go through your options. The experts here at Vehicle Finance Today are always happy to help!