New research has uncovered significant gaps in UK consumers’ understanding of Annual Percentage Rates (APR) — regulation designed to help shoppers compare credit products — resulting in widespread misconceptions that are impacting consumers’ financial decisions.
Major misunderstanding of representative APR
A new study by rewards credit card Yonder found that ‘Representative APR,’ an annualised percentage that includes interest and fees designed to reflect the total cost of borrowing for most applicants, is widely misunderstood by UK consumers.
Although a majority knew that Rep APR stands for ‘representative annual percentage rate’, 9 in 10 (94 per cent) did not know what information the rate tells them and 3 in 4 (74 per cent) could not explain what APR means, despite it being a required component in credit advertising by the Financial Conduct Authority (FCA).
As well as confusion around the percentage itself, 77 per cent also had no idea what the term ‘representative’ referred to, with more than 1 in 4 (29 per cent) thinking it meant that the figure represented the average interest paid by all customers who own the credit card.
Misconceptions impacting financial decisions
These misconceptions about Representative APR were found to be discouraging consumers from exploring paid-for credit products that may offer long-term benefits, as over half (52 per cent) believed the percentage showed the exact interest rate they would pay.
Almost half (47 per cent) said they would avoid applying for a credit card after seeing a high Rep APR, despite more than 8 in 10 (84 per cent) having no idea the rate included any membership fees associated with the card.
Confusion over basic interest rates
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 per cent were incorrect, and a third of those (32 per cent) wrongly assumed they’d be charged £21 the following month—when the actual cost was less than £2.
Even more concerning, two thirds (65 per cent) of respondents believed they would still pay interest, even if they paid their balance in full each month.
Calling for change: Campaign for consumer clarity
The study marks the launch of Yonder’s new campaign ‘WTFisAPR?!’ which aims to tackle misinformation around APR and interest rates. As part of the campaign, Yonder wants to work alongside the 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 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 chief risk officer and 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.”
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