A Representative APR is a financial service concept in the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...

and the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

in which credit or loan interest rates quoted through advertising media are required to take into account all charges associated with a product, in addition to the interest rate.

History

For years, financial services companies in the

had been required to quote an

Annual Percentage Rate The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (EAPR), is the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mort ...

(APR) in any credit terms or advertisements. Up until 2010, all businesses had to comply with the UK Consumer Credit (Advertisement) Regulations 2004 (2004 Regulations).Department for Business, Innovation and Skills,
Regulations Implementing The Consumer Credit Directive: Quick Start Guide"
Aug 2010, page 3 However, all

member states adopted a new Directive in April 2008. This was implemented in the UK by the Consumer Credit (EU Directive) Regulations 2010, which came into force for all UK companies on 1 February 2011. While the Directive is similar to the existing policies adopted in the UK, there are a couple of major changes. One of the most important of these is introduction of a ‘Representative APR’.

What the rules say

Th
Department for Business, Skills and Innovation (BSI)
is clear on what the new Directive means for financial services providers and consumers in the UK. The BSI states: “If an advertisement includes an

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

or any amount relating to the cost of credit, it must also include a representative example.CompareAndSave.com
Emma Skinner (Ed.):
What is a Representative Example?
Published 2010-11-17, Retrieved 2011-11-18 This must contain certain standard information including a representative APR. The example must be clear and concise and must be more prominent than the information that triggered the inclusion of the example.”Department for Business, Innovation and Skills,
Regulations Implementing The Consumer Credit Directive: Quick Start Guide"
(2010), page 5

Products the rules apply to

The new Directive applies to

advertisements Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to present a product or service in terms of utility, advantages, and qualities of interest to consumers. It is typically us ...

and credit agreements for all

loans In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt ( ...

to consumers under £60,260 excluding:Bond Pearce
Consumer Credit Directive sets advertising regulations"
Published on 2010-06-09, Retrieved 2010-11-18 * agreements secured on land * business loans (certified) *

investments Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

regulated by the FSA

Definition of ‘representative APR’

The APR for financial services products often varies from customer to customer. This is particularly true if loan or credit card rates are determined by an individual's income or

credit rating A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government). It is the practice of predicting or forecasting the ability of a supposed debtor to pay back the debt or default. The ...

. In addition, the problem with the current way of working out an APR is that it often doesn't take into account certain fees, such as credit card balance transfer fees or annual charges. So, in instances where the APR for a financial product can vary, the APR that is stated on an advertisement must represent the business that the financial services provider expects to come from that advert. A representative APR will also take into account other charges associated with the product (in addition to the interest rate) and will be displayed within th
Representative Example
A company works out its ‘typical’ APR by taking into account past business that has arisen from advertising similar products, ideally over the previous 12 months. Th
Financial Services Authority (FSA)
suggests to companies that they “list the APRs your customers have paid over the past 12 months. The representative APR you state in your advert should not be less than the APR paid by at least 66% of consumers on the list.”Financial Services Authority:
Mortgages and Home Finance Advertising"
- Retrieved 2010-11-18 However, from 1 February 2011, this calculation changed. The BSI reports that: “The Representative APR must reflect at least 51% of business expected to result from the advertisement. The standard information must be representative of agreements to which the Representative APR applies.” A representative APR will be based on a credit limit of £1,200 (unless known to be lower).

Additional services and security

Another subtle but important change to the rules now make it essential for financial services providers to display, in prominent text, whether there are any obligations on a consumer to enter into another

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

(for example, if you have to take compulsory insurance products with a

mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

). In this situation, the cost must be shown with: * no less prominence than standard information * the representative APR The nature of any

security Security is protection from, or resilience against, potential harm (or other unwanted coercion). Beneficiaries (technically referents) of security may be persons and social groups, objects and institutions, ecosystems, or any other entity or ...

must also be specified.

References

{{reflist Banking Interest rates