Annual percentage rate (APR)

APR stands for Annual Percentage Rate, and it tells you the cost of borrowing money over a year as a percentage, with all fees included. The APR is a good way to understand the full cost of taking out a loan or credit card as it reflects both the interest rate and any fees you’ll have to pay.

The APR is a type of interest rate displayed alongside loans and credit cards that gives borrowers a clearer overview of the overall cost of debt over a year. APR calculations consider the amount you borrow plus any interest and compulsory fees you could incur. You can use it to compare credit cards and loans. 

For example, if you take out a personal loan at 20% APR, it should cost less to repay than taking out a loan at 22.5% APR. You could still be charged for 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 the rates of credit cards and unsecured bank loans, and lenders are obliged to tell you what the APR is before you borrow from them. 

The APR provides a clearer understanding of what you’ll repay, as it includes additional fees. For example, you might find a credit card with an annual interest rate of 15% per year, but the APR is 20.1% because of an additional £25 annual fee. 

Bear in mind that the APR is usually based on the purchase interest rate (e.g. buying items online or instore); the interest rate on cash withdrawals may be different.

A ‘good’ APR will depend on your personal financial circumstances, the amount you want to borrow and the type of loan. Generally speaking, a good APR for a credit card or loan is one that’s below the current average interest rate (the lower the better), and you’ll typically get a better APR if you have a good credit score. According to one comparison site, the average purchase APR rose to a new high of 26.7% in June 2022.

If you’re looking to move an expensive debt to a cheaper credit card, a 0% balance transfer card may be a good option. Many of these types of credit cards have a promotional 0% APR for a set period, which can be anything from three to 34 months. Research has found the length of 0% balance transfers offers increased to an average of 613 days in June 2022. 

Providing you meet the terms and conditions, this kind of deal can cut the cost of borrowingand help you clear your debts faster. However, it’s a good idea to try and pay off the card before the introductory offer ends. Otherwise you may be moved onto the standard APR, which could be much higher.

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

1. It won’t make sense when rates change

The APR helps you understand the amount you need to repay each year over the full term of your debt, but when the interest rate changes, it can get complicated. Take mortgages, for example. The APR on a mortgage is calculated by taking the total interest, typically over a 25-year term, including fees. This means that a lender could advertise a mortgage at 3% APR, but you probably won’t repay at this rate throughout your 25-year term as you might get a fixed rate for two years followed by a higher variable interest rate for the remainder of your term. 

2. You don’t always get the advertised APR

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. For example, if a credit card is advertised as 15.7% representative APR, 51% of successful applicants will get this rate and the remaining 49% of people might be offered a higher 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.

3. The APR only includes compulsory charges

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, but if you do get it, this additional cost won’t be included in the APR as it isn’t compulsory. The APR only includes compulsory charges, so make sure you read the terms and conditions so you know exactly what you’re getting.

Representative APR is the advertised rate given to at least 51% of successful credit card or loan applicants. Personal APR is the rate that you are given when you take out a loan or credit card. It can be the same as the representative APR or it can be higher, depending on your eligibility and financial situation. Your lender will usually decide on the rate you’re offered, and it’s based on how closely your credit and financial information match the lender’s criteria. 

If you have a poor credit score you may be charged a higher APR, given a smaller credit limit or your application could be denied.

The annual equivalent rate (AER) is designed to make comparing savings accounts easier, and the APR is designed to make it easier to compare loans and credit cards. Put simply, APR is for borrowing and AER is for saving. 

You’ll find all the savings accounts advertised in our marketplace are displayed with the AER, allowing you to quickly and easily compare accounts with different terms.

The difference between the interest rate vs APR is that the interest rate is the cost of borrowing the principal amount, and the APR is the cost of borrowing the principal amount plus any additional compulsory fees. Using the APR rather than the interest rate makes it easier to compare loans and credit cards as you have a better idea of how much you’ll have to repay.