What does APR interest rate mean?

When considering taking out a loan or a credit card you will probably come up against the term ‘representative APR’, but what exactly does it mean?

Basically, it means that the rate of interest paid on some forms of borrowing, like a personal loan or a credit card, depends on a person’s individual credit score and previous repayment history.

This sort of personal data is compiled by credit reference agencies such as Equifax, CallCredit and Experian. Many high street banks will use information from these agencies to better understand a person’s repayment history, their lifestyle and also any outstanding debts they may have.

All of the information gathered from a credit reference agency helps the lender build a picture of a potential borrower. It also creates an automated risk profile which determines not only if a person gets the credit they applied for but the rate of interest the lender will charge.

However, many people don’t realise that the figure you see advertised as a ‘representative APR’ is not necessarily the rate you will get. Lenders are required to quote an Annual Percentage Rate (APR) in their advertising. However, legally, a representative APR need only be given to 51 per cent of accepted customers. That means almost half of consumers who apply for a loan or credit card may end up paying more interest that the representative APR advertised.

In contrast, Credit Unions of Wales quote actual rates which means that all successful applicants will get the same rate. Credit unions also decide whether to make a loan based on the individual circumstances of a potential borrower, rather than relying solely on an automated credit check. So, whatever you do, shop around before signing up for a loan or credit card and find the best interest rate to suit your pocket.