What does annual percentage rate (APR) mean?

APR (Annual Percentage Rate) is a combination of interest and any additional fees for borrowing money over a full year. It is shown as a percentage. It’s used for all loans in the UK including mortgages, bank loans and credit cards. If there are no fees the APR is the same as the interest rate. 

Companies have to clearly show the APR of their loans as it’s a legal requirement and it helps us understand the actual cost of a loan.

12% APR means you will be charged 12% of the amount you borrow over a year. To work out the monthly cost of the loan divide the loan amount by 12, as there are 12 months in a year. 12% APR equals 1% per month. 

Representative APR means at least 51% of people get this rate. If you are not very good at repaying loans and have a poor credit score you will probably be offered a higher more expensive APR. 

Related article – What credit score do you need for a mortgage?

Nuts About Money tip

Normally the longer you borrow the money for the lower the APR but as it’s for longer you will have to pay more in the long run. The banks are trying to make a profit. 

If the repayments are too high you can normally reduce them by borrowing the money over a longer timeframe but again, be careful as you will pay more in the long run.

Our top tip is to borrow as little as possible and pay it back as quickly as possible.

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