What is APR and how does it work?

Not sure what APR is? We explain everything you need to know

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So what is APR? You've heard the term before, but do you know exactly what it means and how it works?

This guide explains everything you need to know.

What is APR?

APR stands for Annual Percentage Rate and tells you the cost of any loan or credit you take on. It takes into account the interest rate and additional fees. All lenders have to display their APR before you sign an agreement.

You might think the cost of a credit card or loan is obvious. For example, if you borrow £1,000 at an interest rate of 10% and pay it back after one year it would cost you £100, right? If you paid it back after six months you’d pay half of that. However, it isn’t that simple - and this is where APR comes in.

APR, or Annual Percentage Rate, is the figure to look for because it includes:

  •  The amount of interest charged 
  •  Fees, such as an application fee or annual fee 

An APR gives you the overall cost of a debt and allows you to compare against other credit and loan options, on a like-for-like basis. 

An APR can appear confusing. For example, an interest rate could be 22% per annum but the APR is 27.1% because the £25 annual fee adds the equivalent of another 5.1% interest.

How does APR work? 

You will see ‘representative APR’ or ‘rep APR’ on credit card and loan adverts. This is the rate that at least 51% of those accepted for the credit deal will get - this doesn’t necessarily include you. 

Only 51% of successful applicants must be given this advertised rate. The rest will likely get a different rate - which is often much higher. It means that you can end up surprised by the final rate you are offered.

A personal APR is the rate you are actually given - this could be the same as the representative rate, or it could be higher. The lender decides based on how your credit score and other financial factors match their criteria.

It’s also worth noting that APR only includes essential fees. Some charges, such as payment protection and late payment fees may not be taken into account, reading the terms and conditions carefully and ensuring you fully understand them is essential.

 What is a good APR? 

Generally speaking, with a loan, the more you borrow, the lower the APR.

With credit cards, rates range from 5% to over 30% and usually depends on your credit score.

0% purchase and balance transfer credit cards often have a 0% APR for a promotional period, which lasts for anything between three and 30 months. It’s best to pay off the card before the promotional period ends or you’ll usually be placed on to a standard interest rate.

Can APR help me calculate how much I will pay? 

 Figuring out the amount of interest you pay annually is complicated because: 

  • Credit cards have flexible repayments - you can pay back more one months than another, as long as you pay at least the minimum amount  
  • Your lender will usually calculate interest on a monthly or daily basis.

For example, in the best case scenario where you want to be a savvy money saver, if you pay your credit card balance in full and on time each month, you won’t pay any interest at all - no matter the APR.

Ultimately, APR is a useful way to compare loans and credit cards. If you search for a loan on a price comparison site, the different options are often ranked by APR. Remember, it is not necessarily the rate you will receive. 

Is APR the same as APRC?

APRC stands for annual percentage of charge. It is the same kind of term used when comparing mortgages and secured loans. It isn’t to be confused with APR.

A mortgage APRC highlights the overall cost if borrowing across the whole term of the mortgage - provided the interest rate doesn’t change. Though, more often than not, the rate will change if you have a variable or tracker rate or you decide to remortgage. Again, it’s a complicated calculation which is why it’s best to see an APRC as the best way to compare mortgage rates.

Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities.  Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.