What does APR mean on car finance, and what is the total amount payable?

Consumer credit advertising is heavily regulated precisely because a monthly payment tells you almost nothing. Extend a term, raise a deposit or defer more to a balloon and the monthly figure falls without the borrowing becoming cheaper. APR exists to defeat that: it is a standardised calculation that folds in the interest, the compulsory fees and the timing of the payments, so that any two regulated agreements can be laid side by side. It is not a perfect instrument — it says nothing about mileage limits, condition standards or what you own at the end — but it is the only figure in the room that is calculated the same way by everybody.

Step by step

1. Read APR as the cost of borrowing, standardised.It expresses the total cost of the credit as a yearly percentage, including interest and any fees you have no choice about, and it accounts for when payments fall due. Because the calculation method is prescribed, APRs from different lenders are genuinely comparable.
2. Distinguish it from a flat rate.A flat rate is calculated on the original amount borrowed for the whole term, ignoring the fact that you are paying the balance down. It always looks lower than the equivalent APR, sometimes dramatically. If a rate is quoted without the letters APR, ask what the APR is.
3. Understand representative APR.Advertising rules allow a firm to publish a representative APR if at least 51 per cent of customers who take the product get that rate or better. Up to 49 per cent do not, and what you are offered depends on your credit assessment. A representative APR is not a quote and cannot be relied on as one.
4. Ask for the total amount payable.Deposit, plus every monthly payment, plus any final or balloon payment, plus every fee. It is disclosed on the agreement and in the pre-contract information. It answers the question APR does not: what do I hand over in total?
5. Do the arithmetic yourself as a check.Multiply the monthly payment by the number of months, add the deposit and any final payment and fees, and compare against the stated total amount payable. Subtract the cash price and you have the cost of the credit. Two minutes with a calculator makes the whole agreement legible.
6. Compare the same term and the same deposit.Two quotes with different terms are not comparable on total payable, because a longer term costs more in interest even at the same APR. Ask for like-for-like quotes before comparing, or compare APR for cost of borrowing and total payable only within the same structure.
7. Look at what a soft search does.Many lenders offer an eligibility check or quotation search that does not leave a mark visible to other lenders. Several full applications in a short period can affect your credit file. Ask whether a check is a soft search before agreeing to it.
8. Read the pre-contract information properly.Regulated credit comes with standardised pre-contract information setting out the amount of credit, the APR, the total amount payable, the number and amount of repayments, and your rights including withdrawal. It exists to be read, and it is the only document where all of it is in one place.
9. Ask about commission.FCA rules require firms to disclose the existence and nature of commission arrangements where they may affect the customer. You are entitled to ask how the person arranging the finance is paid, and a straight answer is a reasonable expectation.

Common mistakes

• Treating a representative APR as the rate you will get — The rules only require that a majority of accepted customers get it or better. It is an advertising figure, and the only rate that matters is the one in your own pre-contract information.
• Judging affordability by the monthly payment alone — The monthly figure can be lowered by extending the term or deferring more to a balloon, both of which increase the total cost. It is also silent about excess mileage and condition charges that fall due later.

If it doesn't work

Questions people ask