What is an APR?

APR is a term you will see on several different lending products. Until March 2016 it was used with mortgages, credit cards and loans. Now, there are two very similar versions, essentially doing the same job:

APR – Short for annual percentage rate, it's a legal requirement for APR to be shown on personal loans, credit cards, hire purchase agreements and arranged overdrafts so that an easier and fairer comparison can be made.

APRC – This stands for annual percentage rate of charge and is now used for mortgages, including second charge mortgages (i.e. secured homeowner loans).

To muddy the waters further, there are also two types of APR:

• your personal APR; and
• the representative APR (formerly known as Typical APR).

This is straightforward: a personal APR or APRC is what you will pay.

For a mortgage this will 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 – which it may do with a credit card or a loan.

When you are accepted for a credit card or loan you should check the rate you are being charged, as this could be considerably different to the representative APR quoted on any advertising.

The rate of interest you'll pay on certain credit products is decided by your credit score and status. However, for these products to be comparable prior to application (as you'll never know what rate you'll get until you're accepted), the provider is required to display a representative APR/APRC in advertising.

A representative APR is an advertised rate that a minimum percentage of customers will pay. This minimum percentage is 51% of the people who are accepted for the credit. So, nearly half of all those applying for a credit card, personal loan or overdraft could pay more than the representative APR being advertised.

For personal loans, the representative APR may well differ depending on the size of the loan (for instance, 15% APR for loans of £1,000 to £2,999, and 10% APR for loans of £3,000 to £4,999). Therefore, it's important to only compare representative APRs on the amount you need to borrow, rather than on the headline representative APR, which may not be available on the loan you need.

So, an APR or APRC basically shows how much your borrowing will cost over the period of an average year, over the term of your debt.

These rates consider the interest charged, as well as any additional fees (such as an arrangement fee on a mortgage or an annual fee on a credit card) you'll have to pay. They also consider the frequency with which interest is charged on your borrowing, as this has an impact on how much you'll pay too.

Using an APR or APRC can be a more effective way of comparing financial products than just using the rate of interest charged. That said, it can also be more accurate to compare the actual interest rates and fees you are being charged to determine what you will pay.

For example: APRs on credit cards use the rate of interest charged for purchases made on the card, however the interest rates charged for balance transfers or cash withdrawals may be different, so it's more useful to compare these interest rates (rather than the APR) if that's what you are going to use the card for.