The representative APR is an annualised percentage that includes interest and fees designed to reflect the total cost of borrowing for most applicants.
Although the majority of those questioned knew that ‘rep APR’ stood for ‘representative annual percentage rate’, nine in 10 (94%) didn’t know what information the rate told them and three in four (74%) couldn’t explain what APR meant.
As well as confusion around the percentage itself, 77% also had no idea what the term ‘representative’ referred to, with more than one in four (29%) thinking it meant that the figure represented the average interest paid by all customers who held the credit card.
These misconceptions about representative APR were found to be discouraging consumers from exploring paid-for credit products that may offer long-term benefits, as more than half (52%) believed the percentage showed the exact interest rate they would pay.
Almost half (47%) said they would avoid applying for a credit card after seeing a high representative APR, despite more than eight in 10 (84%) having no idea the rate included any membership fees associated with the card.
Wellness and wellbeing holidays: Travel insurance is essential for your peace of mind
Out of the pandemic lockdowns, there’s a greater emphasis on wellbeing and wellness, with
Sponsored by Post Office
The research also highlighted a broader misunderstanding of interest rates. When asked how much interest they would owe after borrowing £100 at a 21% purchase rate, 85% were incorrect. A third (32%) of those wrongly assumed they’d be charged £21 the following month – when the actual cost was less than £2.
Representative APR ‘too complicated’
Yonder has launched a campaign called ‘WTFisAPR?!’ that aims to tackle misinformation around APR and interest rates.
As part of the campaign, Yonder wants to work alongside the Financial Conduct Authority (FCA) to update guidance for paid-for products in line with new Consumer Duty guidance, to deliver better outcomes for consumers.
Bola Sol, financial adviser and money expert, said: “I’m excited to see what Yonder is doing with this campaign, highlighting the need for clearer financial regulation. Representative APR is supposed to make it easier for people to compare credit products but, in a number of ways, it’s too complicated for most consumers to understand.
“This research shows that it isn’t just frustrating; it has the potential to cause real harm. Credit cards can offer many benefits, like extra protection on purchases, rewards, and the potential to improve your credit score. Yet, the regulation designed to help consumers seems to be doing the opposite. The FCA’s Consumer Duty regulation is a step in the right direction, but this issue urgently needs addressing to help people make informed financial decisions.”
Theso Jivajirajah, Yonder’s co-founder, said: “The use of representative APR to help shoppers compare credit products has good intentions, but it’s clear from our research that misunderstanding around APR is widespread.
“We’re on a mission to simplify the confusion around credit, and with Consumer Duty now enforced, we’d love to work with the FCA to consider making an update to how it’s understood by consumers – which will help them to make smarter financial decisions that aren’t based on information that’s too complex for most to understand.”
