What does APR mean?

You’ll have seen the letters ‘APR’ if you’ve ever looked for a loan. They stand for annual percentage rate and show the total cost of borrowing money over a year. APR doesn’t just include interest, but any fees automatically added to the loan, like arrangement fees. Knowing what the APR is can help you compare personal loans or credit cards.

You’ll have seen the letters ‘APR’ if you’ve ever looked for a loan. They stand for annual percentage rate and show the total cost of borrowing money over a year. APR doesn’t just include interest, but any fees automatically added to the loan, like arrangement fees. Knowing what the APR is can help you compare personal loans or credit cards.

Anelda Knoesen
From the Money team
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Posted 07 JANUARY 2021

What is APR used for?

APR is used for financial products including mortgages, loans, credit cards and car finance. While it’s not an exciting topic, it’s important to understand how APR works because it shows you the true cost of borrowing. That way, you can make a fair, accurate comparison of different types of credit.

When it comes to loans, different loan providers calculate interest in different ways - some might do it daily, others weekly, monthly or annually – making it hard to see which is the cheapest option. So, loan providers have to tell customers the APR to allow them to compare loans more easily.

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 want to borrow £1,000 for one year and the interest rate is 5%, you’ll have to pay back £50 in interest (5% of £1,000) plus the £1,000 you borrowed – a total of £1,050.

Lenders generally calculate loans so that you pay the same amount every month over the course of your loan (even though what you owe is reducing). This means the interest cost is spread evenly across the loan. This is different from credit cards, where the interest is calculated every month.

How long you borrow for will also affect how much you have to pay overall. The quicker you can pay off your loan, the less you’ll generally pay in interest. You can see the impact of different APRs and different loan terms on borrowing the same amount of money in the table below.

Amount borrowed Interest rate APR Loan term Monthly payment Total interest paid Total paid
£10,000 5% 1 £855.57 £266.79 £10,266.79
£10,000 5% 3 £299.21 £771.58 £10,771.58
£10,000 5% 5 £188.20 £1,292.24 £11,292.24
£10,000 5% 10 £105.52 £2,662.82 £12,662.82
£10,000 15% 1 £898.14 £777.72 £10,772.72
£10,000 15% 3 £342.06 £2,314.07 £12,314.07
£10,000 15% 5 £232.98 £3,978.97 £13,978.97
£10,000 15% 10 £155.61 £8,673.77 £18,673.77

Working out the interest rate

To find the monthly interest rate, just divide the APR by 12. For example, the monthly rate on a 6% APR is 0.5%. This can help you compare the rates for loans with monthly credit card rates.

But while interest on a loan might be 5%, the APR might be, say, 8% because it includes other charges, like set-up fees.

What is representative APR?

What you’ll usually see when you look at an advert for a loan is representative APR. This means it’s the rate that must be offered to at least 51% of successful applicants.

But there’s a ‘but’. That rate might not be the one the other 49% of applicants get. In fact, most of them are likely to be offered a higher rate.

The APR you’re actually offered is the ‘real’ APR – the interest rate you’ll have to pay if you take out the loan. And you won’t find out what that rate is until you’ve applied for the loan. If you have a poor credit history, you might be offered a much higher APR than the representative APR.

APR is a useful benchmark for comparing loans – it’s a legal requirement that it’s shown. And generally speaking, a low APR indicates lower interest rates and low fees. But while APR is good for making comparisons, it’s not the only thing you need to know about. It’s vital you look at every aspect of the loan before you commit.

What is variable APR?

A fixed APR will stay the same, so you know exactly how much you need to pay back. A variable APR can change over the course of a loan, so your monthly payments may change. While there are several reasons why variable APRs change, many track the Bank of England interest rate and go up or down accordingly. Variable APRs are commonly used for credit cards.

What affects APR?

Providing loans is competitive and loan providers look to pull in customers with their best rates. But getting a low APR is influenced by:

  • your credit record
  • the amount you want to borrow
  • the length of time you want to borrow for – the loan term.

Typically, the better your credit score, the lower the rate you’ll be offered; the worse your credit score, the higher the rate.

When deciding whether to offer you a loan, as well as considering what APR to offer, lenders must look at affordability. This means that when you apply, they must consider whether you’ll be able to make the repayments and make them on time. They may also consider what other debt you have and how much of the credit available to you – your credit utilisation ratio - you’re using.

How to get a low APR loan

Your credit record

To get a loan at the lowest APR, you’ll need a very good credit history. If your credit history isn’t so great 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
  • TransUnion

The amount you borrow

Generally, the more you borrow, the lower the rate you’ll see quoted. See these two illustrative examples below (not based on actual market rates):

Initial loan APR APR cost Total repayment
£3,000 over 2 years 9% £277.71 £3,277.71
£7,000 over 2 years 6% £433.84 £7,433.84

But don’t be tempted by lower rates: 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 paying off your loan over a longer period of time - extending the term. 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 be aware of the total cost of the loan.

Loan Loan period APR Monthly payment
£6,000 3 years 9%  £189.82
£6,000 7 years 9% £95.47

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.

APR for unsecured loans vs APRC for mortgages and secured loans

APRC stands for annual percentage rate of charge. It’s used to compare mortgages and other loans that are secured against an asset – your house, for example. If you don’t pay back the loan, you could lose your home. APRC is designed to show you, as a percentage, the annual cost of a loan, including fees and other costs.

The APRC 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 mean it’s not that useful when comparing mortgage deals as most people won't stay with the same provider. People move home and many remortgage to a better deal when their fixed term comes to an end. 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, which will show the interest rate as an APR. You can compare mortgages and compare remortgages with Compare the Market.

How do I find out my personal loan rate?

You might not be able to find out what rate you could be offered until you’ve applied for a loan.

And every time you make a loan application, a hard credit check is recorded on your credit file. Lenders can’t see whether or not you were accepted but if they see multiple applications in a short period of time, it could raise a red flag and mean you might be turned down or you’ll get a higher APR.

When you compare with Compare the Market, we’ll show you loans you’re eligible for – without impacting your credit score. So you won’t damage your record by applying for loans that you’re unlikely to get.

Finding the right loan for you

We’re here to make things as straightforward as possible. When it comes to comparing loans, we’ll make it clear what the APRs are, what you need to pay each month and overall. Compare loans to find a deal to suit you.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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