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Annual percentage rate (APR)

You’ve probably seen the term APR used in conjunction with financial topics, but if you’ve ever seen this term and asked yourself, “what does APR mean?”, don’t worry, you’re not alone. On this page, you’ll find everything you need to know about APR, including what it is, how it works, and the differences between APR and other types of interest rates.

What is APR?What is APR?What is APR?

What does APR stand for?

APR stands for annual percentage rate.

What is the APR?

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.

 

How does the APR work?

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.

Three things you should know about the APR

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.

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.

What’s the difference between personal APR and representative APR?

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.

What’s the difference between APR and AER?

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.

What’s the interest rate vs APR?

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.

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