How APR works on UK loans and credit cards

APR is the figure you see on every loan and credit card advert, and it is meant to help you compare the cost of borrowing. It is a useful number, but only if you understand what it measures and what it leaves out. A lower APR does not always mean you will pay less, and a representative APR may not be the rate you are offered. This guide explains what APR stands for, what is counted in it, what representative APR means, and how it relates to the monthly payment. It works through a loan example and a credit card example with real numbers, shows why a longer loan can cost more even at a lower rate, and explains how APR differs from the AER used for savings.

By Valtrinity. Updated 18 October 2026.

What APR is

APR stands for annual percentage rate. It expresses the yearly cost of borrowing as a percentage, and it includes the interest and certain compulsory charges, such as an arrangement fee, that you must pay to get the credit. By law, lenders in the UK must show an APR in their adverts and in the pre-contract information, so you can compare similar products.

It is calculated on the assumption that you borrow the money for the full term, make every payment on time, and that the rate and charges stay as quoted. It also assumes that interest compounds, so the APR is an effective annual rate: the interest charged on interest is built in.

APR is the same idea as the AER you see on savings accounts, but it is used for borrowing. A lower figure is better for borrowers, whereas a higher AER is better for savers.

What APR includes and what it leaves out

APR includes the interest and any mandatory fees, such as a loan arrangement fee, that form part of the cost of credit. It does not include charges that only apply if something happens, such as late payment fees, missed payment charges, or penalties for paying a loan off early. Optional extras, such as payment protection, are normally left out too, because you can choose whether to buy them.

For credit cards, APR does not include a cash advance fee, a balance transfer fee or foreign transaction charges, although these may be shown elsewhere. Look at the summary box and the terms for the full list.

It is also not a promise of what you will pay. If you pay a credit card in full each month before the due date, you generally pay no interest on purchases, whatever the APR. If you repay a loan early, you may pay less interest, although some lenders charge a fee.

Representative APR

Most adverts show a representative APR. Under the Financial Conduct Authority's rules, at least 51 per cent of the people who take out the product as a result of the advert must be given that rate or lower. That means up to 49 per cent can be offered a higher rate.

So the advertised figure is not guaranteed. Your own rate depends on your credit record, your income and the amount you borrow. Some lenders let you check a quote using a soft search, which does not leave a mark on your credit file visible to other lenders, before you make a full application.

When comparing, use the personal rate you are actually offered, not the headline figure. If two lenders both quote a representative 9.9 per cent, they may offer you 7.9 and 14.9 respectively.

A loan example: £5,000 over three years

Suppose you borrow £5,000 over 36 months at an APR of 9.9 per cent, with no fees. Because APR is an effective annual rate, the equivalent monthly rate is the twelfth root of 1.099 minus 1, which is about 0.79 per cent.

With that rate, the monthly payment works out at about £160.11. Over 36 months you repay about £5,764, so the cost of borrowing is about £764. That is the amount of interest. A small difference in the way a lender rounds or sets the first payment date can change the figures by a few pence.

Now compare a five year loan of the same amount at a lower APR of 6.9 per cent. The monthly payment falls to about £98.28, which looks far more affordable. But over 60 months you repay about £5,897, so the interest is about £897. The lower rate costs more overall because the money is borrowed for longer. A lower monthly payment is not the same as a cheaper loan.

A credit card example

A credit card quoting 24.9 per cent APR has a monthly interest rate of about 1.87 per cent, since the twelfth root of 1.249 is 1.0187. On a £1,000 balance, that is about £18.70 of interest in the first month if you do not pay it off.

If you only pay £25 a month and spend nothing more on the card, it would take about 75 months, which is 6 years and 3 months, to clear the balance, and you would pay about £1,860 in total, of which about £860 is interest. Paying £50 a month would clear it in about 26 months, with around £264 of interest.

That is why the minimum payment is not a good target. Lenders must show on your statement how long it takes to clear the balance and how much it costs if you pay only the minimum. Reading that box is a good way to see the true effect of a high APR.

APR compared with other rates

The AER, annual equivalent rate, is the savings version. It shows the interest you earn in a year allowing for compounding. For example, 4 per cent a year added monthly has an AER of about 4.07 per cent. The gross rate is the headline interest rate before compounding.

A flat rate is a different way of quoting interest, calculated on the original amount for the whole term, with no reduction as you repay. It makes the cost look lower than it is. If a flat rate is quoted, ask for the APR, because that is the figure that allows a fair comparison.

Overdrafts are different. Since April 2020, UK banks must price overdrafts using a single annual interest rate, shown as an EAR, which is also an effective annual rate. Buy now pay later arrangements may not show an APR at all, so look closely at the terms.

How to compare offers in practice

Compare the APR for the same amount and the same term. Then compare the monthly payment and the total amount repayable, because a lower APR over a longer term can cost more in total. A lender must show the total amount payable in the pre-contract information.

Check for fees that sit outside the APR, such as early repayment charges or late fees, and check whether the rate is fixed or can change. A fixed rate stays the same, and a variable rate can go up or down. For a credit card, look at the promotional period, if any, and what the rate becomes afterwards.

Finally, borrow only what you can afford to repay. If you are having difficulty with debts, impartial help at no cost is available from organisations such as MoneyHelper, Citizens Advice and StepChange, and you should contact your lender early if you think you may miss a payment.

Tools mentioned in this guide

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