APR — Annual Percentage Rate — is the true annual cost of borrowing money, expressed as a percentage. Unlike a raw interest rate, APR includes fees, making it the right number to use when comparing loan products. Understanding the difference could save you thousands.
APR vs. Interest Rate
Example: Loan A — 5% rate, £1,000 origination fee. Loan B — 5.5% rate, no fees. Over 3 years, Loan B may actually be cheaper. You'd only know by comparing APRs.
Representative APR vs. Personal APR
In the UK, lenders must advertise a "representative APR" — the rate at least 51% of approved applicants receive. Your personal APR depends on your credit score. You could be offered significantly higher than the headline rate. Always check your actual offer.
Credit Card APR: The Trap
Credit card APR looks manageable — but on a £5,000 balance with minimum payments, you'd pay roughly £6,500 in interest over 20+ years. Key benchmarks:
- Average UK credit card: ~25% APR
- 0% purchase cards: 0% for 12–24 months, then 20–25%
- Store cards: often 30–40% — among the most expensive credit available
- Payday loans: 1,000–5,000% APR
APR becomes irrelevant if you pay in full each month — interest is never charged. It only matters when you carry a balance.
Using APR for Mortgages
Two mortgages with identical interest rates but different fees will have different APRs. Over a 25-year term, even small differences compound enormously:
- A 0.2% APR difference on a £250,000 mortgage = roughly £12,000 over 25 years
- Mortgage arrangement fees of £1–2k should be weighed against the rate savings they secure
- Remortgaging every 2 years means paying fees repeatedly — always factor into your total cost