You may have noticed that we display a representative APR on our homepage. We calculate representative APR in line with the standard, legally required definition but it can be tricky to understand how this actually relates to the amount you pay.

What is an APR?

APR or “annual percentage rate” is a standard measure of pricing that can be calculated for any type of loan, mortgage or credit card. Every lender has to use the same definition so it’s designed to help you to compare pricing.

The APR is calculated as the total interest rate that you would be charged if you borrowed the full loan amount, kept the funds for a whole year and then paid back everything at the end of the year.

How does the APR compare to the total cost of credit?

Whilst APR can be a useful metric, it generally doesn’t actually reflect the total cost of credit because:

  • You normally pay back loans in weekly or monthly instalments, rather than paying back the full loan amount and interest at the end of the term
  • You are unlikely to keep the funds for exactly a year, either because your scheduled loan term is different or because you choose to repay early

If you’re comparing iwoca to alternative providers it’s important to make sure you compare total cost of credit based on how you plan to use the funds, not just the APR. For instance, if another lender charges a large upfront fee, their APR may be lower but the fee will still be due if you repay early. This means they may work out to be more expensive for shorter periods.

What does this mean in practice?

Here’s an example of how the total cost of credit might compare to the APR for a typical iwoca customer:

  • Assume a customer borrows £10,000 at a 3.33% per month interest rate, corresponding to our 49% representative APR
  • Each month, they’re required to pay off at least their accrued interest and  1/12 of their original loan amount
  • If they just make their minimum repayments, after 12 months they will have paid off their loan. They will have paid  a total of £2,165 in interest or 21.65% of their original loan
  • However, they might actually decide to repay early which would reduce the cost further. For instance, if they repay the full amount after one month they will only pay £333 in interest or 3.33% of the original loan

As you can see, in both scenarios, the total cost of the loan is much lower than the 49% representative APR might suggest. Use our interactive calculator to see how much iwoca is likely to cost in practice, based on your amount, rate and duration.

What is a representative rate?

“Representative” means that at least 51% of new customers are expected to get approved for this rate or better. In other words, if you see “representative” you know the lender is not just showing you a rate that’s only available to their very best customers.

Note that the representative rate published on our homepage is for businesses that get approved for £25,000 or under, in line with regulatory requirements. You can see a full breakdown of how our representative APR varies with loan size at the bottom of our pricing page.

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