APR Explained: How To Understand APR

Written By: Hannah O'Neill
Published: October 12, 2023

If you’ve ever applied for a loan or credit card, you’ve probably seen the term APR. Also known as the Annual Percentage Rate, it details the actual cost of borrowing money, and it’s one of the most important factors to consider when signing any loan or credit agreement.

Lenders are legally obligated to tell borrowers these rates upfront, but that doesn’t always mean making the right decision is easy.

In this guide, we’ll explore APR in depth so you have the information you need to make a decision that aligns with your finances.

What is an annual percentage rate?

Annual percentage rates refer to the cost of borrowing over one year and include additional fees. When you borrow money – whether in credit cards or loans – the lender charges fees to ensure they receive back more money than they lend.

In simple terms, it clearly outlines how much you’ll pay each year. APR has two primary components: the interest rate and any associated fees.

Interest rates

The interest rate is the main component of APR, a percentage of the initial amount you borrow. Lenders charge this as a cost of borrowing money from them, and they base the amount on numerous factors.

Depending on the provider’s policies, you could secure better rates with a good credit score and responsible borrowing history.

Additional fees

Along with interest rates, the APR also factors other fees associated with credit and loan agreements. For example, the lender could add service charges and administrative charges to the total amount, as well as arrangement costs.

The fees associated with your borrowing depend on the lender, but they can increase the amount you owe.

Why is it important to understand APR?

According to research by IFA Magazine, 64% of people in the UK don’t understand what a mortgage APR is. So, it would stand to reason that they probably don’t know how it works with loans and credit cards either.

However, understanding APR is central to finding suitable credit agreements for your current and financial needs.

Loan providers are legally obligated to show their advertised rates to only 51% of consumers, which means many consumers don’t see how much interest they’ll pay in the long term.

Knowing how annual percentage rates work gives you more security, as you can compare loan types and choose a low-interest deal that suits your needs.

Representative/typical APR

You’ve probably seen various credit cards and loan options referred to as having a representative or typical APR—but what does it mean?

These rates are what 51% or more applicants receive when they apply for a particular product. However, it also means that 49% of people could be dealing with much higher interest rates, depending on your credit history, score and whether you’ve experienced financial issues before.

Remember, just because an APR is advertised doesn’t mean you’ll necessarily receive those rates, so be sure to research before applying.

APR explained

It’s easiest to highlight the finer details of APR with examples: suppose you spend £4,000 on your credit card, which has a 12% APR. The annual percentage rate is usually divided over 12 months, meaning you’ll pay 1% of your outstanding balance each month.

If you don’t repay any of the money for a month, the lender will add on £40. The longer it takes to pay off your debt, the more credit card companies will charge.

Fixed and variable interest rates

One of the biggest considerations with any financial product with interest rates is whether to opt for a fixed or variable deal. Both have advantages and disadvantages, but it also depends on what the lender is willing to offer.

Let’s take a look at how both agreements work.

Fixed interest rate 

Fixed APRs mean your interest rates will remain stable and won’t go up or down throughout the agreed period. Many personal loan agreements come with fixed rates, which makes it easier to budget throughout your repayment duration.

Credit card companies sometimes have introductory fixed interest rates or offer 0% on purchases for a set term.

The pros: 

  • Your interest rates won’t fluctuate for the specified period.
  • It’s easy to budget with a fixed APR.
  • You’ll save money if the Bank of England base rate increases.

The cons:

  • You might have a higher APR because you’re getting more consistency, but lenders can’t increase your rates.
  • If the market rates decrease, you’ll still pay the same amount.
  • Fixed APRs aren’t always available.

Variable interest rate 

Variable APRs are common with various financial products, and the rates you receive will change depending on the Bank of England’s base rates. For example, most people start with fixed-rate mortgages, but once the agreement finishes, they move on to variable-rate mortgages.

Credit card issuers also usually introduce variable interest rates, which means your monthly repayments can fluctuate depending on market conditions.


  • If conditions improve, your interest rates fall, and you’ll save money.
  • Variable APRs usually have lower rates initially.
  • These agreements can be beneficial for short-term borrowing.


  • You’ll pay more if the interest rates rise.
  • The monthly payments can be unpredictable, which isn’t ideal for people without a fixed income.
  • Some people find dealing with the lender’s standard variable rate too stressful.

What counts as a good APR?

The APR you’re offered depends on numerous factors, including the type of financial product you apply for:

  • Credit Cards: Many credit card providers offer an average APR of 21% to 23% for people with good credit scores, but you could receive lower rates with an excellent score. Individuals with poor credit or a limited credit history often get higher rates, up to 50%.
  • Personal Loans: Unsecured borrowing APRs depend on the amount you borrow and your credit score. For example, if you borrow £5,000 with an excellent credit score, your interest rate could be just over 10%, but the rates also depend on the lender.
  • Mortgage Rates: Mortgage interest rates vary depending on whether you have a fixed or variable agreement. However, SVRs change with the economy, so looking at what you could potentially pay after the fixed term ends is essential.

How to find the best APRs for your needs

Regardless of the financial product you’re applying for, it is possible to find better rates than mainstream lenders advertise.

Believe Money is one of the UK’s most reputable loan brokers, specialising in helping our clients find the right products for their current circumstances and financial goals.

Our dedicated brokers have access to a network of specialist lenders that aren’t available through mainstream avenues and work with clients from all backgrounds.

If you’d like to access the best rates for loans or mortgages, please feel free to contact us for a free consultation today.


Which products have APRs?

The main products with APRs are personal loans and mortgages. However, you might also have an APR with a savings account.

How does my credit score affect the APR I’m offered?

Your credit score directly impacts the APR you’re offered, as lenders are more likely to give you a better loan term and interest rates if you have a good to excellent credit score.

The loan provider or credit card issuer takes on more risk when they accept people with poor credit scores, and that’s why they usually have higher interest rates.

How are APR and AER different?

While APR represents the annual cost of borrowing, AER (Annual Equivalent Rate) refers to the return you receive annually on investments and savings accounts. So, APR is about how much you spend, while AER is your potential earnings.

About the Author

Hannah O'Neill

Hannah O'Neill

Hannah O'Neill is a leading financial expert with over 10 years of experience in credit and loans. She is helping people achieve their financial goals based in the United Kingdom. She has been featured in numerous media outlets. Her articles offer practical advice on how to improve your credit score, get the best possible loan rates, and manage your debt wisely.

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