APR Explained

What APR means

APR is a standardised way of showing what borrowing costs over a year. Crucially, it rolls together the interest rate and certain compulsory charges — such as some set-up or arrangement fees — into a single yearly percentage. That makes it a fairer comparison tool than an interest rate alone, because two loans with the same interest rate can cost different amounts once fees are included.

APR versus the interest rate

The interest rate is just the cost of the money you borrow. The APR builds a fuller picture by adding in compulsory charges. Because of this, the APR is usually equal to or higher than the plain interest rate. When comparing products of the same type and term, the one with the lower APR is generally the cheaper.

Why “representative” matters

Adverts usually quote a “representative APR”. Under the rules, a lender only has to offer the representative rate to at least 51% of the people it accepts. That means up to 49% of successful applicants can be charged more, and people who are declined are not counted at all.

• The rate you personally are offered can be higher than the advertised representative APR
• Your rate can depend on your credit record, income and how much you borrow
• Some lenders offer an “eligibility” or quotation check that does not affect your credit score

Comparing the true cost

APR is most useful for comparing similar products over similar terms. It works less well across very different products — for example a short interest-free promotion can look very different in APR terms. Alongside the APR, look at the total amount repayable and how long you will be paying, so you can see the real cost in pounds as well as in percentage terms. A loan repayment calculator can help you work out the total cost of a loan.