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What is the annual percentage rate or APR?

APR stands for Annual Percentage Rate. Credit providers use it to help you understand how much it will cost to borrow money from them. Here’s all you need to know about how it works.

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APR makes it easier for consumers to compare products on a like-for-like basis.

What does APR mean?

The annual percentage rate, or APR, refers to the total cost of your borrowing for a year. It includes the interest you must pay plus any additional fees. 

All personal loans and credit cards have an APR. Before you sign a credit agreement, lenders must tell you the APR, which they calculate using a Financial Conduct Authority (FCA) formula.

The APR is expressed as a percentage of the amount you’ve borrowed, making it easier for consumers to compare products on a like-for-like basis. For example, a credit card with an APR of 17% should be cheaper than one with an APR of 23%.

However, you should still check the terms and conditions because the APR only includes compulsory charges. It doesn’t contain late payments or cash withdrawal fees, for example. 

Credit card calculator

Use the credit card calculator to help work out the costs of owning a credit card.

What’s the difference between APR and the interest rate?

The interest rate is simply the amount charged on the money you borrow. If you looked at the interest rate alone, you wouldn’t necessarily have a clear picture of which loan or credit card works out cheapest. 

For example, if Credit Card A had an interest rate of 20% and Credit Card B had an interest rate of 23%, you’d assume Credit Card A was the cheapest. 

But if Credit Card A had an annual fee and Credit Card B had no annual fee, Credit Card B could work out cheaper overall. 

The APR factors in this fee, making it easier for you to compare products and work out which will be cheaper in terms of total cost.  

What does representative APR mean?

The representative APR is the APR you see advertised when comparing credit cards and loans. 

Only 51% of successful applicants for that product must receive the representative APR, meaning the remaining 49% may not be eligible for the advertised APR and could pay a higher rate. 

It’s important to keep this in mind when comparing your options.

How do I find out what my APR rate is?

The rate you receive is known as your personal APR. The lender usually only tells you this after you apply for credit.

However, many credit card and loan providers offer eligibility checkers that assess your likelihood of being accepted for a particular card or loan. If you’re pre-approved, some of these checkers also give you a personal APR, so you know the precise rate you’ll get if you apply in full. 

Eligibility checkers only use a soft search, meaning they won’t impact your credit score.  

What affects your APR?

Lenders assessing your personal APR look at your income and household spending. If you’re applying for a personal loan, the provider will consider the amount you want to borrow and the length of the loan.

Factors that also help determine your APR include your credit history, credit score and financial circumstances. 

Lenders will consider how well you’ve borrowed in the past. If you’ve repaid debts on time and haven’t exceeded your credit limit, lenders will view you as lower risk and be more likely to offer you a competitive APR.

By comparison, lenders are more likely to offer a higher APR to someone who has previously missed a lot of credit repayments or struggled to repay their debt. 

Find out more about how your personal credit rating affects the interest you pay with our guide to credit scoring.

Low APR credit cards

Find a credit card with a low rate of interest to handle your regular payments

American Express credit cards - card close up
APR makes it easier for consumers to compare products on a like-for-like basis.

What is considered a good APR?

The lower the APR, the better. A lower APR means you’ll pay less in interest and other charges. 

Some credit cards offer 0% APR on purchases and balance transfers for a number of months, which means you won’t pay any interest at all during that time. However, if you haven’t paid off your credit card balance before the 0% deal ends, the APR will usually jump to around 21% to 24%.

Generally, an APR below 21% is relatively low. Anything over 24% is more expensive. If you pay off your credit card balance in full every month, the APR won’t be as important as you won’t be paying interest. But if you forget and the APR is high, the interest charges will quickly rack up.

High APRs often apply to credit building credit cards, which are designed for those with poor credit. APRs tend to sit between 24% and 34%, so paying off your balance in full each month is best to avoid paying these high rates. 

Premium or reward credit cards also tend to come with higher APRs, as they often have an annual fee.

Lenders generally offer the best personal loan rates to those borrowing between £7,500 and £15,000. The most competitive APRs for loans of this size sit around 6% to 7%.

Is APR the most important aspect of a credit card? That depends. If you’re confident you can always repay your balance in full each month, the APR won’t matter. Instead, you might want to focus on perks such as air miles or cashback

On the other hand, if you know you won’t be able to pay off your balance in full each month, the APR should be a major consideration.

What is an ARPC?

APRC stands for annual percentage rate of charge. Lenders use it to let you compare mortgages and secured loans. 

When you apply for a mortgage, you usually pay an introductory rate for two to five years, depending on the deal. The rate then reverts to the lender’s standard variable rate. The APRC takes both of these rates into account and indicates the overall cost of borrowing across the whole term of the mortgage – usually around 25 years. 

In short, the APRC shows you exactly how much you would pay if you stayed on the same mortgage until you’d paid back the amount borrowed in full. However, if you switch to a new mortgage once the introductory deal has ended, you don’t need to worry about the APRC.

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