What is Representative APR when Getting a Loan?

What is Representative APR when Getting a Loan

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At the beginning of February 2011 a new law came into effect in the UK that demanded all loan providers promote Representative APR. This was a move designed to bring greater transparency to the borrowing process and protect consumers from unscrupulous lenders. So what exactly is representative APR and what effect has it had on the accessibility of loans?

As has already been mentioned, the key idea behind introducing a representative APR is to encourage improved transparency within the loan industry. So rather than simply having an Annual Percentage Rate and hiding away other fees somewhere in the small print, this representative figure encompasses all costs. It also represents the majority of all customers (51%+) so that you can easily work out repayment costs.

Therefore the representative APR is the percentage you'll pay over the course of a year on top of the amount borrowed. In the case of a personal loan this will often remain around the same, with most banks generally incorporating fees into the interest (or not having them at all). However, for lenders at the other end of the scale, who offer loans to those with poor credit ratings at a higher cost, representative APR is likely to have a far larger impact.

Payday loans are something of a notorious example. Much like many other forms of unsecured borrowing, there is often a fairly sizeable difference in the amount of interest being charged. The move towards a representative APR has, many would argue, highlighted just how large this gulf has become.

The advertised interest can be a little deceptive though. Whilst working perfectly for a loan that lasts years, it doesn't always translate to those that are designed for shorter periods - particularly if it is only a matter of days, as is often the case. As a consequence the representative APR will often reach well in excess of one thousand per cent.

But this eye watering figure is only half the story. Whilst it is an indication of the kind of cost you're likely to incur - particularly when comparing like for like quotes amongst payday loan providers - it doesn't actually mean that you'll end up paying over a hundred times the amount you've borrowed.

However, the major benefit for consumers who are seeking a short-term solution is that representative APR means that a lender can no longer hide behind a seemingly decent interest rate before piling on the charges for cash transfers. Many lenders have found it all too easy to drop the visible costs, only to increase other fees when you come to apply. This isn't necessarily untoward behaviour; however, it can be misleading for consumers who look no further than the APR rate. Obviously this move to representative APR negates this risk and will force many companies to clean up their act.

Whilst some might argue that it doesn't solve the greater issues of determining the interest for short-term loans, it does at least provide an industry standard that all lenders must abide by. Failure to do so will obviously contravene laws and potentially lead to the invalidation of their license or hefty fines. Invariably there will still be some confusion and consumers may take time to completely understand what the difference between conventional Annual Percentage Rate and Representative APR - but it should see greater ethics and ease of use in the long run.

So to summarise, the representative APR that is now being shown on all websites, bank advertisements and other literature relating to lending, is the full interest inclusive of charges - all of which are averaged over the course of a year. Even if the figure rises, this doesn't necessarily mean that you are getting charged more, it's just another way of representing the same overall figure in a clearer way.

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