What is APR?

What APR measures

Two lenders offer you £10,000 over three years. One quotes 8% with a £500 arrangement fee. The other quotes 9% with no fee. Which costs less?

You cannot tell from the interest rates alone, which is why APR exists. It folds the interest rate together with the compulsory charges of taking the credit and expresses the whole thing as one annual percentage — so two offers become comparable.

APR = the rate at which the present value of every repayment equals the money you actually receive

Put both offers into the APR calculator and the fee-bearing loan comes out more expensive despite the lower headline rate. That inversion is common.

Representative APR: the important caveat

This is the part that catches people out.

When a UK lender advertises an APR, FCA rules generally require it to be a representative APR — the rate that at least 51% of customers who are accepted for the product will actually be given.

Read that again: 51%. Up to 49% of successful applicants can be offered something worse. And that is 51% of people accepted, not 51% of people who apply — those turned down are not in the calculation at all.

Use a soft search first

Because the offered rate can differ from the advertised one, and because a full application leaves a hard footprint on your credit file, UK lenders and comparison sites widely offer eligibility checkers that run a soft search.

A soft search:

• Shows how likely you are to be accepted, and often a personalised rate.
• Is visible to you on your credit file but not to other lenders.
• Does not affect your credit score.

Using one before applying means you avoid collecting hard searches from applications that were never going to succeed. Confirm the checker is genuinely a soft search before proceeding — it should say so explicitly.

What is inside the APR

For a loan, the APR generally includes interest plus compulsory charges required to take the credit — arrangement fees, for instance. It excludes charges that depend on your own conduct, such as late payment fees, and optional extras you can decline.

For a credit card, the APR represents the cost of borrowing on the card but does not include the annual fee. A card advertising 24.9% APR with a £195 annual fee therefore costs more than 24.9% a year to carry.

A single card also has several rates at once:

Where APR misleads

Different terms. A 6% APR over seven years costs far more in total than a 7% APR over three. APR normalises the rate, not the duration — compare the total amount repayable too.

Different loan sizes. UK personal loan rates are usually tiered by amount, and the best advertised rates typically apply to a middle band. Borrowing £1,000 more than you need to reach a cheaper tier is occasionally rational and usually not — check the total repayable both ways.

0% credit. A genuinely interest-free deal has a 0% APR. Interest-free periods on credit cards are real, and what matters is what happens at the end of them.

How to use APR well

1. Compare APRs only between offers of the same amount and term.
2. Look at the total amount repayable, which lenders must also show — it is the number in pounds.
3. Use a soft-search eligibility checker before applying anywhere.
4. On a credit card, check the annual fee separately from the APR.
5. Check whether the lender charges for early repayment before assuming you can shorten the loan.