If you’ve ever compared the cost of a credit card, loan or mortgage you’ll probably have noticed the term ‘representative example’ being used.

A representative example is designed to show consumers the true cost of an advertised financial product.

The introduction of representative examples

In 2011, the UK government replaced the Consumer Credit Directive with the 2008 European Union Consumer Credit Directive. With this, came six sets of regulations that changed the way in which finance companies could advertise their products.

One of the largest and most notable changes to come from this was the introduction of the representative example. From this point on, all lenders were required to state a representative example when advertising a financial product.

What makes up a representative example?

A representative example is comprised of several parts, this includes:

  • A total amount of credit – this is typically the lender’s average loan amount and term (e.g. £3,000 over 36 months)
  • The monthly repayment amount – based on the representative loan amount and term
  • The total cost of credit – this is often simplified to the ‘total amount repayable’ and refers to the total amount that will be repaid over the full loan term. For example, if the loan term if 24 months and the monthly repayments are £200, the total cost of credit would be £4,800. Any additional fees or charges must also be stated here.
  • The rate of interest – this can be either a fixed or variable percentage that is applied annually. Fixed interest rates mean that the loan repayments will never change, providing you meet them on time and in full. The rpeayments on variable rate may go up or down in line with the prime rate or any other index.
  • The representative APR – This is the interest rate that you’ll pay back over the course of the year (inclusive of fees and charges). Only 51% of accepted applicants will receive this rate, the remaining 49% will receive a different rate.

How should the representative example be presented?

According to the Department for Business, Innovation and Skills (BIS), the representative example must be more prominent than the information that triggered the inclusion.  So for a website promotion, the font used for the representative example should be more prominent than that used on the promotion.

The BIS also states that it should contain all the required information (mentioned above) in a clear and concise manner.

Summary

The representative example was brought into play to help customers better understand the cost of the agreement they are entering. All credit  providers are now required to prominently display their representative example in a clear and concise manner. Always look out for this as it is a good legitimacy indicator for finance companies.

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