APR—it’s so much more than just three little letters.

APR stands for Annual Percentage Rate, this is a rate that helps you understand how much it will cost you to borrow money over a year, including interest and other potential fees.

Knowing what APR is and how it works is key to understanding borrowing rates and help you to assess financial products such as loans and credit cards.

This simple Q&A guide will help grow your money confidence and prepare you with everything you need to know to understand APR.

What is APR?

The Annual Percentage Rate shows the total cost of borrowing money, so you can compare different providers and offers.

APR is a helpful tool for comparing interest rates across different products or providers, but it doesn’t show what type of borrowing could be the best fit for your needs.

Importance of APR.

Understanding APR is key to making informed decisions about borrowing money.

Representative APR can be used as a tool to compare the cost of different loans and credit products on a like-for-like basis between providers. Representative APR is the rate of interest used by providers that at least 51% of customers applying receive, so you may receive a different percentage depending on your profile.

Once you are further down the process of applying for a credit card or loan, you’ll be given a personal APR that is the actual rate you’re offered. So you can make sure you’re choosing a product that aligns with your goals and circumstances.

Components of APR

APR includes several different factors, which provide the total cost of borrowing:

Interest Rate

The APR is the yearly interest rate charged on borrowing products. It’s the cost you pay the bank to borrow money, determined by your credit score and financial situation.

Fees

APR also factors in additional fees that are associated with the loan, such as application and administrative fees, annual fees for your credit card or loan, and any other charges that the lender may add in.

Keep in mind that APR only includes standard fees incurred for opening and maintaining borrowing and doesn’t factor in if you miss a payment or pay late, depending on the providers terms, there might be extra fees added in these cases.

Types of APR

The APR shows the total interest and fees you’ll pay on a loan, credit card, or other borrowed funds. You might see APR when you first apply, during promotional periods, or as rates change over time. Different financial products also come with different types of APR:

Purchase APR

Purchase APR applies specifically to purchases that you make with a credit card. For example, if you have a balance of £3,000 on your credit card, your APR will apply to that amount.

Balance Transfer APR

Balance transfer ARP is a summary of the yearly interest and fees that you’ll pay when you move the balance from one credit card to another.

For example, if you are consolidating your debt and want to move a £3,000 balance from one credit card to another, the balance transfer APR will apply to the £3,000 that you transfer.

Many credit card providers will offer a promotional low or 0% balance transfer APR for a limited time, which will then increase once you have transferred the balance and the promotional period has ended. 

Cash Advance APR

A cash advance is a way of getting a short-term loan from your bank or credit card issuer by taking out cash using your existing line of credit.

This typically comes with its own APR rate, which is higher than the purchase APR you pay for your credit card. You may also have to pay an additional one-time cash advance fee that is separate from your APR rate

Introductory APR

Introductory APR (sometimes just called “Intro APR”) is typically a low or 0% promotional rate that’s offered at the beginning of a loan or credit card agreement.

It will apply to your loan or credit card balance for a set period of time, and then increase to the regular, higher APR rate. When looking at introductory APR, it’s important to review the entire agreement so you have a clear idea of how long the term is and what the APR will be once the promotional period has ended.

Isn’t that the same as an interest rate?

No, because as well as the interest you have to pay, it includes any other fees and charges, such as an annual fee for a credit card, or a loan arrangement fee.

Factors Affecting APR

There are many different factors that determine the APR for specific financial products and individual borrowers.

Credit Rating

Your credit rating is a summary of your financial reputation, based on a variety of factors including your borrowing history. Typically, customers who have a higher credit rating will receive a lower personal APR when seeking a new loan or credit card.

Loan Amount

When borrowing for a Loan, the amount of money you seek to borrow also factors into APR rates. Generally speaking, higher sums have lower APR, while smaller loan amounts have higher APR. This varies significantly depending on the financial product and the timeline of the loan.

Loan Term

As well as the loan amount, the timeline in which you agree to repay the loan will impact the APR. Short term loans tend to be associated with high APR, whereas longer loan terms typically will see a lower APR.

Hang on, what’s representative APR then?

Representative APR is based on a rate that at least 51% of customers seeing the promotion and applying will get.

The actual rate you get when you apply is specific to you known as personal APR, which is based on your application and credit-scoring.

Find out more about your credit rating and how to improve it here.

APR in Different Financial Products

APR is applicable to many different financial products. While the general principles of APR remain consistent, it’s important to understand how it applies to different loans and credit circumstances.

Credit Cards

Just as there are many different credit card products to choose from, credit card APR can look a little different depending on which card you have and how you intend to use it. The three main considerations to keep in mind are:

• Purchase APR, which applies to the balance on your card.
• Balance transfer APR, which applies to the balance you’ve transferred from an old card and onto a new one.
• Cash advance APR, which applies to any instance where you want to use your credit card to take out cash—it’s important to note that this is often a different APR than the purchase APR.

Personal Loans

APR for a personal loan encompasses the interest rate and application or origination fee you’ll pay for borrowing a set amount of money, broken down into a yearly percentage. Typically, this is a set amount that will be factored into your overall repayment plan.

Mortgage

Annual Percentage Rate (APR) The Annual Percentage Rate (APR) of charge takes into account not just the interest on the Mortgage but also other charges you have to pay, for example, any arrangement fee. You can use this to compare different Mortgage offers from different lenders as they all have to calculate the APR in exactly the same way.

Why not get in touch with a TSB mortgage expert if you're buying your first home or looking to refinance your existing mortgage?

Will my APR always stay the same?

Not necessarily. If a loan has a fixed APR, you’ll know from the outset how much your payments will be, and the total you will pay overall. However, any credit card with a variable APR, can change at any time. Your credit card issuer will need to let you know about these changes in advance. The APR on a Mortgage is fixed for a period of time depending on your mortgage term.

I’m getting a 0% balance transfer card, so I don’t need to bother about APR, right?

It’s still just as important to compare the APR you will pay on new purchases and on the balance once the 0% period comes to an end. Once the introductory rate comes to an end, its usually replaced by a higher rate, which will depend on a number of features including your credit score. Find out more about your credit rating and how to improve it here.

Anything else to watch out for?

Yes - APR does not include all potential charges, such as fees for missing a payment or spending more than your credit limit, fees for withdrawing cash on a credit card, and currency conversion if you make purchases abroad. So, make sure you are aware of all the terms and conditions of your borrowing before you sign up.