APR is the true cost of borrowing — not just the interest rate. Here's what it includes, how it's calculated, and why it matters for mortgages and credit cards.
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.
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.
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 looks manageable — but on a £5,000 balance with minimum payments, you'd pay roughly £6,500 in interest over 20+ years. Key benchmarks:
APR becomes irrelevant if you pay in full each month — interest is never charged. It only matters when you carry a balance.
Two mortgages with identical interest rates but different fees will have different APRs. Over a 25-year term, even small differences compound enormously: