Most credit card, loan or mortgage applications mention APR, but what does it mean?
APR stands for Annual Percentage Rate. It measures the interest rate and other charges for financial products like personal loans and credit cards.
APR represents your yearly payments if you've borrowed money from these products.
Lenders calculate it using a formula in the Consumer Credit Act (1974), which every lender must follow.
There are several reasons why APR is important:
Lenders express APR as a percentage of the amount you're borrowing.
The lower the percentage, the cheaper the borrowing should be — but always check the terms and conditions in case there are extra charges, like payment protection or late payment fines.
Here's an example of how APR works, based on borrowing £10,000:
|Loan term||3 years||3years|
|Annual interest rate||3.10%||3.80%|
|36x monthly instalments||£291.06||£298.78|
|Total charge for the credit||£478.25||£756.14|
|Total amount repayable||£10,478.25||£10,756.14|
APR includes the interest rate on borrowing and standard additional fees and costs, such as annual fees, discount points and closing costs.
Lenders calculate APR using several variables. APR considers:
A standard interest rate is the amount of interest due each period as a proportion of the amount borrowed.
It's usually expressed as an annual percentage.
But interest rates only account for one potential cost of borrowing. APR includes other standard fees, giving you a more well-rounded idea of what you'll pay to borrow.
Representative APR is the advertised rate that at least 51% of customers will pay. It's useful because it lets you quickly compare lenders and products without applying.
The representative APR is only guaranteed for some, while others applying for a credit card or personal loan could pay more than the advertised rate.
Personal APR is the rate you're offered based on your financial circumstances and the amount you want to borrow. It could be the same as the representative rate, or it could be higher or lower.
Lenders usually look at your credit score and other financial information to help them decide which rate to offer you.
If you're looking for a personal loan, you can see the personal APR that we would offer you by getting a quote. Don't worry, using this tool won't impact your credit score.
With APR, you can estimate how much borrowing will cost annually, including the interest rate and standard fees.
AER (Annual Effective Rate or Annual Equivalent Rate) goes further. It considers compound interest when calculating the percentage – any interest charged on top of the interest added to your borrowing over a year.
Other types of APR could also apply to your borrowing:
The answer depends on your financial circumstances and how much you can realistically afford to pay back.
Generally, the better your credit score, the lower the APR you’ll be offered. Here are a few things you can try to get a lower APR on a credit card or loan.
There are several ways you can improve your credit score. You can check your credit score – without impacting your overall rating – with one of the UK's three credit rating agencies: Equifax, Experian, and TransUnion.
Many credit card providers offer 0% APR as an introductory offer, lasting for a specified time. Once the promotional period ends, you'll be moved onto the standard APR, so it's a good idea to note when it ends and try to pay off the card before then.
APR is a guide for comparing one loan with another based on its total cost. It isn't a perfect measure of the total cost of borrowing, as it doesn't include costs that aren't a compulsory part of the loan.
The rate is only sometimes guaranteed, and the company may offer a higher rate than the headline based on your current circumstances.