Know Your Interest Rates – Representative APR vs Exact APR
If you are thinking of purchasing your next motorbike using a loan or other finance agreement, be sure that you understand all of the financial jargon before you sign on the dotted line.
You probably are already aware that loans and finance agreements come with interest on top of them. Because there is no such thing as a free money, borrowing to buy your bike, or leasing with the help of a little bit of Hire Purchase will incur extra charges over the course of the term. This is called the Annual Percentage Rate – the APR – and something that anyone entering into a credit agreement must be made aware of.
How much extra you pay can vary depending not just on the amount of credit, but also on your own financial situation. Because our credit rating is based on a scoring system that varies from person to person, the actual amount of interest you pay will also vary to meet the lender’s requirements.
What Is An APR?
The Annual Percentage Rate – APR – is the amount of interest that is added to the total amount owed, including any other fees. When you borrow money, the APR is the amount of interest that’s added to the total amount owed, and any other associated fees. This is calculated per year and then split over 12 months to form the monthly payment amount.
Here’s an example:
You borrow £10,000 for a bike using a personal loan with an APR of 3%, with repayments spread across 36 months (3 years).
Your lender will calculate the 3% rate added in years one, two and three and then add it onto the amount borrowed. When they split this into 36 equal payments, this gives you the monthly payment amount. Simples!
What does Representative APR mean?
Representative APR is exactly what it says on the packet – it is “representative” of the amount you could be paying – an example price if you will.
Because manufacturers and dealerships want to win us over with their bargain basement finance offers, they are quick to tell us just how exciting their APR deals are. But, they are also duty-bound to include a real-life example of the actual amount a buyer will have to pay, usually printed in the small-print of any advertising or marketing material.
Because we all have very different credit profiles, no lender can confidently advertise a flat rate that suits all potential customers, so instead, they use an example.
The Representative APR therefore is nothing more than an example cost and should represent what the lowest APR that the lender is willing to offer at least 51% of people who are accepted.
Here’s another example:
You notice an advert for a personal loan with an apr of 12%. This means that the majority i.e. 51% of people who take up this credit offer, will get the loan with a 12% APR. The remaining 49% however, will not.
The problem with tempting looking APR’s is that unless you are one of the 51% of people with an acceptable credit profile, the offer may not be quite as tasty as it first appears. If for example, you end up having to pay a significantly higher APR as a result of a lower credit score, you may not be able to realistically afford the repayments, and consequently the loan.
As with any lending agreement, nothing comes for free. More often than not there will be some interest payable, even if it is deferred for part of the term. Be sure to make sure you fully understand your obligations and how much you will be paying before you enter into a financial agreement for you next motorbike.