What is APR, and how does it work?

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Most credit card, loan or mortgage applications mention APR, but what does it mean? 

We'll discuss: 

What’s APR?

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:

  1. stops lenders from hiding any additional costs
  2. makes sure you get an accurate representation of borrowing
  3. allows fair comparisons between lenders when you consider a product

How does APR work?

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: 


  £10,000 £10,000
Loan term 3 years 3years
APR 3.10% 3.80%
Annual interest rate 3.10% 3.80%
Borrowing fee £0 £154
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

What does APR include?

APR includes the interest rate on borrowing and standard additional fees and costs, such as annual fees, discount points and closing costs. 

How is APR calculated?

Lenders calculate APR using several variables. APR considers: 

  • the interest rate and when it's charged (daily, weekly, monthly or yearly) 
  • initial fees, like a sign-on charge 
  • any compulsory charges applied to the loan, which you must pay as a condition of taking it out.

The difference between APR and interest rate

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.  

What does representative APR mean?

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. 

What does personal APR mean?

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. 

The difference between APR and AER

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.

Different types of APR

Other types of APR could also apply to your borrowing:

  • introductory APR – normally lower than a typical APR, an introductory APR is sometimes offered to new customers for a specified period. 
  • balance transfer APR – what you'll pay to transfer a balance from one credit card to a new one. 
  • penalty APR – a high-interest rate that can be applied if you are late making repayments or regularly exceeding your credit limit. 
  • cash advance APR – the cost of borrowing cash from a credit card, typically higher than the APR on purchases. 

What’s a good APR?

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.

Build – and maintain – a good credit score

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. 

Take advantage of an introductory offer

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. 

Things to remember

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.