What is APR? Annual percentage rate explained

What does APR stand for?

APR stands for annual percentage rate. It is a term you will see on unsecured lending products such as personal loans, credit cards and current account overdrafts, and is designed to ensure that an easier and fairer comparison can be made.

The APR shows how much you can expect to pay for your borrowing over a year, taking into account any fees and charges as well as the interest rate.

This makes like-for-like comparisons much easier, as interest rates only show so much – all providers operate differently in terms of the amount and type of fees they charge and even how they apply interest, so having an APR can give a much more accurate indication of how much your borrowing will cost, and therefore which product offers the best deal.

Typically speaking, the lower the APR, the less you’ll pay.

APR vs. interest rates

If you only looked at the interest rate of a product, you likely wouldn’t get a true picture of how much you’ll pay over the year as the fees aren’t taken into account, and this can have a huge impact on the total cost.

Note that there are different rates to be aware of when it comes to overdrafts, namely the equivalent annual rate (EAR). You can find more about how current account overdrafts work in our guide.

What is representative APR?

The representative APR is an advertised rate that a minimum percentage – in this case 51% – of customers will pay. This means that at least 51% of those who are accepted for credit will pay the advertised rate, but it also means that nearly half could be offered a higher rate.

This is because the rate you’ll be offered will be dependent on a range of additional factors, not least your credit score, and only those with a good enough rating will be eligible for the representative APR.

It’s also important to note that, for personal loans, the representative APR may differ depending on the loan amount (for instance, 15% APR for loans of £1,000 to £2,999, and 10% APR for loans of £3,000 to £4,999). Therefore, you should only compare representative APRs on the amount you need to borrow. You can get an idea of the amount you’ll pay by using our loan calculator.

The representative APR makes it easier to compare products, but remember that this may not be the rate you’ll get. The personal APR is.

Personal APR

The personal APR is the rate you’ll be offered, and ultimately what you will pay. It may be the same as the representative APR but, because it’s decided by your personal circumstances, it may well be higher.

Things that can impact your personal APR include your:

• credit score
• household expenditure
• salary and employment status
• existing debts.

These factors will affect your eligibility for credit as well as the rate you’ll be charged. For example, if you’ve got a low credit score with hefty outgoings and a lot of existing debt, you may find it harder to be accepted, and the rates offered will typically be far higher than the representative APR.

This means that, when you’re accepted for a credit card or loan you should never assume you’ll be offered the representative APR. Always check the rate you are personally being charged, as this could be considerably different to that quoted on any advertising.

APR on credit cards

APR applies to credit cards too, and is based on standard assumptions to help you effectively compare the options:

• Uses the interest rate for purchases
• Based on a credit limit of £1,200
• Assumes regular payments over the year
• Assumes the balance stays constant with no additional spending.

Your personal APR will therefore be based on things like the credit limit as well as your own credit score, and there may be additional costs to bear in mind too.

This is because the APR only includes any standard fees charged by the credit card – such as annual or monthly fees – and not charges for things like cash withdrawals, overseas transactions, balance transfers or late payments. It also doesn’t take into account the interest rate for things like balance or money transfers.

This means that, while the APR is still an excellent tool to help you compare credit cards, it’s important to consider any additional features and/or charges to ensure it’s the right one for you.

Bear in mind too that in the case of 0% credit cards, the APR is still listed, though here it will be calculated on the rate applied after the interest-free period ends.

What is a good APR?

Typically speaking, the lower the APR, the cheaper it will be, as it means you’ll be charged less interest and so can keep your borrowing costs as low as possible.

This means it’s often a good idea to start your search on that basis, but always remember that your personal APR could be very different to the representative APR listed, so make sure to factor that into your considerations – and if you want to stand the best possible chance of being offered a good APR, you may want to work on improving your credit score ahead of your application.

Also bear in mind that interest rates for things like balance transfers could be very different to the APR advertised, so if you’re looking for something more specific, you’ll probably want to compare the individual interest rates instead.

What is an APRC?

The APRC stands for annual percentage rate of charge, and it’s the standard rate advertised for mortgages and secured loans (including second charge mortgages). It’s essentially the same as the APR – it shows how much your borrowing will cost over an average year for the full term of the mortgage, taking into account any additional fees (such as mortgage arrangement fees) and the frequency with which interest is charged on your borrowing.

However, a key difference is that there’s no representative and personal APRC. For a mortgage, the rate you’re offered will always be the same as the advertised APRC, as with a mortgage you can either have it or you can't. If you can have the mortgage, the rate doesn't change depending on your credit score or circumstances, making it far more cut and dried .

Because the APRC considers the cost for the full term of the loan, it takes into account both the initial advertised rate as well as the revert rate. It assumes that the rate won’t change at all in that time, which means the APRC may not be a wholly accurate indication of how much you can expect to pay for your mortgage.

This is because you’re quite likely to remortgage at some point during the term, particularly if you’re tied into a short-term deal, and even if you’re on your lender’s standard variable rate (SVR) it’s highly likely to change over the years.

For this reason the APRC should only be a starting point when considering your mortgage costs. For a more accurate idea of your likely outlay, it’s worth consulting a mortgage broker, who can help you determine which deal will be right for you.