What is the meaning of Annual Percentage Rate (APR)?

APR stands for Annual Percentage Rate, and it represents the total yearly cost of borrowing money. Once you know what APR means, it becomes easier to compare different loan and credit card options on a like for like basis. This page explains how APR works, the difference between representative and personal APR, and what it all means for your finances.

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APR stands for Annual Percentage Rate, and it tells you the cost of borrowing money over a year as a percentage, including interest and standard fees (such as an application fee or annual fee). Because the percentage lets you work out how much your debt will cost, it can be helpful when deciding between different loan and credit card lenders.

For example, if you take out a personal loan at 20% APR, it should cost less to repay than a loan at 22.5% APR. You could still be charged additional fees, so it’s important to always thoroughly check the terms and conditions before taking out a loan or credit card.

The APR is mainly used to make it easier to compare borrowing costs between the different lenders. Generally speaking, the lower the APR, the cheaper it will be to borrow. In the UK, lenders are obliged to tell you what the APR is before you borrow from them. 

The APR means you have a clearer understanding of what you’ll repay. For example, you might find a credit card with an annual interest rate of 15%, but if it also has a £25 annual fee, the APR is 20.1% to reflect both costs.

With credit cards, the APR advertised is usually the purchase interest rate (e.g. buying items online or in-store); the interest rate on cash withdrawals may be different. Plus, credit cards often come with other fees that may not be included in the APR. Fees for late repayments or going over your credit limit may make the cost of borrowing higher, depending on how you use the card.

APR isn’t to be confused with the AER (annual equivalent rate), which is the rate you’ll typically find on savings accounts. Here are the differences at a glance:

It’s only after you’ve applied for a credit product and the lender has assessed your financial situation that you’ll be offered a personal APR. As a result, you may find that the final rate is higher than what’s advertised (the representative APR). That’s why it’s important not to assume you’ll receive the advertised headline rate when applying for a loan or credit card.

With mortgages, the APR is known as the APRC (Annual Percentage Rate of Change). The rate you are offered is influenced by your credit score.

A ‘good’ APR will depend on the amount you want to borrow and the type of loan. Generally speaking, the lower the APR, the better.

According to the Financial Times, the average credit card APR rose to 35.7% in June 2025.

Some credit cards offer a 0% APR introductory period on purchases or balance transfers. Although this can cut the cost of borrowing (temporarily) and help you clear your debts faster, the standard APR that comes into effect after the introductory period can end up much higher.

While the APR means you can make better comparisons on the money you borrow, there are some downsides to using this type of interest rate.

The APR helps you understand the amount you need to repay each year, but when the interest rate changes, it can get complicated. For example, if the rate on your loan changes halfway through, the original APR might no longer reflect your actual yearly cost. This can happen with mortgages or variable-rate credit products.

Lenders sometimes use the term “representative APR” when advertising the APR of a loan or credit card. This means that they only have to give up to 51% of applicants the advertised interest rate. Everyone else may be given a higher interest rate.

With credit cards, the rate for purchases is used as the advertised rate. The APR for balance transfers and cash withdrawals may be different, so it’s always best to check. While the APR can be a good way to compare credit cards, it’s important to remember that the actual rate you’ll pay depends on how and when you pay your debt off.

If you take out a loan, some lenders automatically add payment protection charges to your quote. However, payment protection is usually voluntary, so you have the option to decline it. If you do opt in, the cost won’t be included in the APR as it isn’t compulsory. Make sure you read the terms and conditions so you know exactly what APR means on each loan or credit option.

While APR helps you understand the cost of borrowing, AER shows how much interest you could earn on your savings. If you’re looking to grow your money, Raisin UK makes it easy to compare savings accounts with competitive AERs. Simply register for free, choose and apply for a savings account, and deposit your money to get started.