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What does APR mean?

What does APR mean?

The annual percentage rate - or APR - is the cost of borrowing money over the course of a year. The percentage figure allows people to compare the cost they’ll face when taking out a loan or credit card.

Our guide fills you in on all you need to know on APR.

Anelda Knoesen
From the Money team
minute read
posted 26 NOVEMBER 2019

Loans, interest and APR: how they work together

If you take out a loan, you’ll need to pay interest on it. 

The interest charged depends on:

  • how much you want to borrow
  • how long you want to borrow the money for
  • your individual circumstances, including your credit score

For example, if you wanted to borrow £1,000 for one year and the interest rate was 5%, you’d have to pay back £50 in interest (5% of £1,000) plus the £1,000 you borrowed – a total of £1,050. 

So far, so good, right? But interest isn’t the whole story when it comes to the cost of a loan. There are also possible fees and charges to consider.

APR stands for annual percentage rate. It’s what your borrowing will cost you each year, and includes interest as well as any other standard charges, such as arrangement or admin fees. 

So, for example, while interest on a loan might be 5%, the APR might be 8% because it includes the other charges.

Representative APR vs real APR

Lenders are required to tell you about representative or typical APR when they advertise a loan.

This is the APR that 51% or more of successful applicants will get. But that rate may not be available to the other 49% of applicants, most of whom are likely to be offered a higher rate.  The APR you’re actually offered is the ‘real’ APR – the interest rate you will have to pay if you take out the loan if you have a poor credit history you might be offered a much higher APR.  

When you apply for a loan, you might not be able to find out whether you’ll be accepted or what rate you could be offered until you’ve actually been through the application process (although some providers do have eligibility calculators to help you find out before you apply).

So when you apply, be confident that your application will be accepted, because if you’re rejected and then make several loan applications to get the funds you need, this can impact on whether or not you’re successful. Each loan application is recorded on your credit file. Whether or not you were accepted isn’t visible to a lender but they can see multiple applications in a short period of time, which could raise a red flag and mean you may not be accepted for a loan or you’ll receive a higher APR.  

So, ideally you should only apply for deals you’re confident of being accepted for.

APR is a useful benchmark for comparing loans – it’s a legal requirement that it’s shown. Generally speaking, a low APR indicates lower interest rates and low associated fees. But while APR is good for making comparisons, it’s vital you look at every aspect of the loan before committing. 

How to get a loan with low APR

The business of providing loans is a competitive one and loan providers are therefore looking to attract customers with their best rates. But getting a low APR is influenced by:

Your credit record

To get a loan at the lowest APR, you’ll need a very good credit history. If your credit history is damaged or you haven’t borrowed before, you may find that you have to pay more.

You can check your credit score for free with the main credit reference agencies:

  • Experian
  • Equifax  
  • Callcredit

The amount you borrow

Generally, the more you borrow, the lower the rate you’ll see quoted. For example:

Inital loan APR APR cost Total repayment
£3,000 9% £270 £3,270
£7,000 6% £420 £7,420

However, you should only borrow the amount you can afford to pay back.

The length of time you borrow for

Another way of lowering your payments is by extending the term of your loan. This will drive down your monthly repayments and mean you pay less over the course of the year. See the difference in monthly repayments in this example, but also the total cost of the loan.

Loan Loan period APR Monthly payment Total payment Cost of loan
£6,000 3 years  9%  £189.82 £6,833.49 £833.49
£6,000 7 years 9% £95.47 £8,019.35 £2,019.35

Borrowing for longer means you end up paying out more in the long run, so be careful and don't be seduced by lower rates over a longer period. The golden rule of borrowing is to borrow as little as possible and pay it back as quickly as possible.

Even with a low APR, borrowing should always be carefully budgeted for. You don’t want to put yourself under unnecessary financial strain in the future.

Your loan and compound interest

Compound interest is another thing to consider when you take out a loan. This is the interest not just on the loan amount, but on the interest as well. 

Compound interest is great if you have a savings account but not so great if you have a loan. 

Let’s say you had savings of £1,000 and earned 5% interest in one year. After 12 months, you’d have gained £50 in interest – a total of £1,050 in your account.  

But in year two with compound interest, you would accrue interest not just on your capital amount (your initial £1,000) but also on the interest. So you would earn 5% of £1,050 which is £52.50.

When it comes to loans, compound interest is exaggerated the longer the loan period is – because you’re paying interest over more time. A £1,000 loan at a 5% APR will cost you in total £26.68 on top of the initial sum if you pay it back in a year. If you take 10 years, the cost rises to £266.28 on top of the original £1,000.

You should always make sure you read the terms and conditions of your loan to avoid any costly surprises.


Just as APR is a way of comparing loans or credit, AER (annual equivalent rate) is what’s used to compare savings accounts.

AER works by assuming you’re going to put your savings away for a year. It takes into account any compound interest plus any bonus introductory rates. 

APR for unsecured loans vs APRC for mortgages and secured loans

APRC is used to compare mortgages and also other loans that are secured against an asset e.g. your house. APRC stands for annual percentage rate of charge. It’s designed to show you, as a percentage, the annual cost of a loan including fees and other costs, if you keep your mortgage or homeowner loan for the full term. 

Usually when you get a mortgage you might be offered a deal that gives you a set period, say two years, at a lower fixed rate of interest. Once this period is up you then get moved to the standard variable rate. At this point your mortgage payments would increase. APRC takes into account these different rates and all fees and charges that you need to pay to get a mortgage from a provider, such as arrangement fees. It helps you compare the overall mortgage costs from different suppliers in exactly the same way. 

It assumes you keep the same mortgage product and provider for the whole length of the mortgage (usually 25 years) and that interest rates don't change. This can make it of limited use as most people won't stay with the same provider. People move home, and many borrowers compare deals when their fixed term comes to an end and remortgage to a better deal. If you’re going to be an active switcher, the initial rate might be of more importance to you. 

Homeowner loans – loans that are secured against your home – will show their interest rate as an APRC. It's a handy reminder to help you see the difference between a secured loan and an unsecured loan.

You can compare mortgages and compare remortgages with Compare the Market.

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