The advertised APR isn’t necessarily what you’ll pay on loans and credit cards. Find out your odds of being offered the representative rate - and improve them.
Unfortunately, after you’ve applied and been told the good news that you’ve been accepted, sometimes there’s a nasty shock in store when you receive the paperwork and find out the APR you’ll have to pay is actually far higher than the rate you saw advertised.
What’s more, for credit cards you might also be offered shorter interest-free promotional periods, or a lower credit limit than the advertised example.
Although it seems a good thing being accepted for a credit card or loan, the fact is that the lender doesn’t have to offer the advertised interest rate to everyone who’s accepted for the product.
Lenders apply risk-based pricing, which means that if they consider you to be at greater risk of defaulting on the agreement, they might offer you less favourable terms.
Applicants are credit scored by the lender when they apply and - while some won’t score highly enough and will be rejected - others will be considered creditworthy enough to be offered the product, but at a higher APR.
Where a credit card or loan advertises a representative APR, the lender must give that rate to just 51% of applicants who are accepted for the card.
The other 49% may be offered a different - usually higher - rate.
Remember, it’s only 51% of accepted applicants who have to be offered the headline rate, not 51% of all applicants.
Before 2011, loan providers used to advertise their product with typical APR, which is slightly different to representative APR.
If a product advertised a typical APR then at least 66% of accepted applicants would have been offered the advertised rate.
However, typical APR fell out of use when the European Consumer Credit Directive came into force in February 2011, so you should now only see products advertised using representative APR.
The lender is likely to reserve the headline rate for the applicants it finds most desirable.
You often don’t find out what APR you’ll be offered until you receive the loan or credit card paperwork to sign
In most cases this is likely to be applicants with excellent credit records who show a history of repaid borrowing, no defaults and long-term address and banking history.
However, different lenders will look for different things in the type of borrower they want, so some will credit score certain types of customers higher than others.
This can mean that you're offered an APR higher than the representative, even when you consider yourself to have a spotless credit record.
The problem is you often won’t find out what APR you’ll be offered until you receive the loan or credit card paperwork to sign.
On 20 August, 2015, Gocompare.com analysed 86 loans listed on the matrix of independent financial researcher Defaqto and found that just 6% offered a straightforward acceptance onto the advertised rate, or a decline.
The remaining 94% had risk-based pricing, meaning the APR offered would vary depending on the applicant’s credit status.
In one case, there was a 64% difference between the representative APR and the maximum rate a successful applicant could be offered.
On credit cards, it’s not just the representative APR that you might miss out on if the lender decides your credit score isn’t up to scratch - you might be offered a different deal altogether.
In its 2014 Credit Card Market Study, the Financial Conduct Authority (FCA) noted that: “The exact terms and conditions of a credit card contract (eg the credit limit) are not clear to consumers until they have applied and been accepted for a specific credit card, as the advertised terms and conditions can differ from those offered.”
On 20 August, 2015, Gocompare.com analysed 260 credit cards listed on the matrix of independent financial researcher Defaqto and found that 44% of them varied the interest rate depending on the applicant’s credit status.
Maximum APRs were 30% higher than the advertised representative APRs on some cards.
What’s more, 10% of the cards would offer alternative durations for introductory offers (such as interest-free periods on purchases and balance transfers) depending on the circumstances of the applicant.
That means that, even if you’re accepted for a card, you could be offered a shorter interest-free period if the lender decides your credit score isn’t high enough to secure the advertised deal.
Finally, credit card advertisements include a representative repayment example based on an assumed credit limit - yet there’s no guarantee you’ll be offered the same limit, meaning your own repayments could be very different to what’s shown if you’re awarded a higher or lower credit limit.
If you receive the loan or credit card paperwork only to find you haven’t been offered the rate you want, you might decide to apply for a different product instead, but this can cause further problems.
That’s because every time you make an application, it’s recorded on your credit file.
Lenders can see the applications, but if you subsequently don’t accept the product they may assume you’ve been rejected.
This means that multiple applications in a short space of time can make you look desperate for credit, meaning lenders are more likely to reject you in future, which can lead to a spiral of rejection.
When you compare credit card deals with Gocompare.com, you'll be presented with key information, including the representative APR.
You can view the card providers' summary boxes by clicking 'Apply' to see more details.
In 2012, the UK Cards Association published guidelines for credit card summary boxes,† which state: "Where risk-based pricing is used a range of rates must be shown in the summary box in addition to the representative APR."
However, the guidelines simply outline best practice and are not mandatory, and in practice many lenders, whether for credit cards or loans, don’t include an APR range in addition to the representative APR in their advertisements.
Fiona Hoyle, head of consumer credit at the Finance and Leasing Association,† explained that: “If lenders had to include the full range of APRs in their advertisements, it could be quite complicated and confusing.”
Hoyle noted that there are tools available to consumers to help them assess their chances of being accepted for a particular product before applying:
"Customers can still shop around by taking advantage of the new technologies that lenders are using which provide potential customers with an indication of the interest rate that would apply to them - before they actually apply."
Richard Koch, head of policy at the UK Cards Association, said: "There are strict rules in place governing how credit card companies can advertise deals and providers are legally obliged to offer their advertised APRs to at least half of their customers.
"The credit card industry has a long-standing commitment to transparency, that’s why we took the step of developing a summary box.
"However, we recognise the difficulties some consumers have in understanding complex details like APR, and so we are always looking at more creative ways of delivering this information using new technology.
"As the APR a customer is offered can depend on their specific circumstances, it is not always possible to give the exact rate they will be offered before the details of the application are processed.
"However, many credit card providers offer consumers the ability to check their eligibility for a particular card before carrying out a full application, which doesn’t have an impact on their credit rating."
If you’re shopping for a loan, Gocompare.com’s service includes a ‘smart search’ feature, which shows your likelihood of acceptance before you apply without affecting your credit rating.
Finally, if you’re having problems with being rejected for credit or being offered higher APRs than you expected, it’s a good idea to check credit reports held about you for any problems that might be causing this.