What does APR mean?
You’ll have seen the letters ‘APR’ if you’ve ever looked for an unsecured 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, such as arrangement fees. Knowing what the APR is can help you compare personal loans.
You’ll have seen the letters ‘APR’ if you’ve ever looked for an unsecured 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, such as arrangement fees. Knowing what the APR is can help you compare personal loans.
What is APR used for?
APR is used in almost every type of borrowing, for example – 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 the cheapest option is. 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 – the loan term
- your individual circumstances, including your credit score.
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 repay 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, for example, monthly credit card rates.
But while interest on a loan might be 5%, the APR might be, say, 8% – because it includes other charges, such as arrangement 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, or their applications are rejected.
The APR you’re actually offered is the ‘real’ APR – the interest rate you’ll have to pay if you take out the loan. You won’t find out what that APR 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.
The APR is useful as it provides a benchmark for comparing loans. It is a regulatory requirement to display the APR in adverts and marketing materials. Generally speaking, a low APR indicates lower interest rates and low fees. While APR is useful for comparisons, it’s vital to look at every aspect of the loan before you commit.
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 you have to pay more.
You can check your credit score for free with the main credit reference agencies:
- Experian
- Equifax
- TransUnion
Lenders have to check that a customer can afford the loan, regardless of their credit score, before a loan can go ahead.
The amount you borrow
Generally, the more you borrow, the lower the APR 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 extending the term and paying off your loan over a longer period of time. This will drive down your monthly repayments, meaning that you will pay less over the course of the year. These two illustrative examples below show the difference in monthly repayments and the total cost of the loan.
| Loan | Loan period | APR | Monthly payment | Total repayment |
|---|---|---|---|---|
| £6,000 | 3 years | 9% | £189.82 | £6,833.52 |
| £6,000 | 7 years | 9% | £95.47 | £8,019.48 |
Borrowing for longer means you end up paying back 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 secured 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.
Finding the loan that best meets your needs
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.
Frequently asked questions
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 that available credit – your credit utilisation ratio – you’re using.
Is APR fixed when you take out a loan?
With most personal loans, the APR is fixed and will stay the same for the whole loan term, so you know exactly how much you need to pay back each month. But some loans may have variable APRs. This means that the rate can change over time, so your monthly payments could go up or down. Before you apply to borrow money, check which type of APR you’re being offered so you know what to expect.
Can I get a low APR loan with bad credit?
If you have a poor credit rating, it’s unlikely you’ll be accepted for a loan with a low APR. That’s because you’re seen as high risk in the eyes of lenders.
You might have to see if you qualify for a bad credit loan or a guarantor loan instead. These are specifically designed for people who have previously been refused credit, have a low credit score or have no credit history at all. But they have higher APRs than standard personal loans, making them an expensive way to borrow money. So, if you go down this route, you’ll need to make sure you can comfortably afford your monthly repayments.
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 credit record by applying for loans that you’re unlikely to get.
What’s the different between representative APRs and guaranteed APRs?
Currently, the majority of lenders will promote a representative APR. This means that the APR you see may not be the APR you receive when you successfully apply. Lenders to have to make sure that they give this to at least 51% of their customers who were shown the offer.
The good news is that more and more lenders are beginning to offer guaranteed APRs via price comparison sites when you’re pre-approved for their product. This means that the rate you see on the eligibility results will be the rate you’ll get. These guaranteed rates are still subject to final lender checks fraud and accuracy of the information provided.
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The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.