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APR and the total cost of borrowing
APR is the standard way to compare what credit costs over a year, but it is only part of the picture. The total amount repayable tells you what you will actually pay back.
What APR stands for
APR means annual percentage rate. It is a single figure that combines the interest rate with certain compulsory charges, such as arrangement fees, and expresses them as a yearly percentage of the amount borrowed. UK law requires lenders to show it in adverts and pre-contract information, so you can compare similar products. A lower APR generally means cheaper borrowing, but only when the term and amount are the same.
Representative APR
Adverts often quote a "representative APR". This is the rate that at least 51% of people who take the product must receive, so up to 49% could be offered a higher rate. The rate offered to you may be higher than the one advertised and depends on your circumstances and the lender's assessment. Always wait for the personalised quote before judging the cost.
Total amount repayable
The pre-contract information must show the total amount repayable. This is the best figure to focus on: it is the sum of every instalment. Subtract the amount you borrowed and you see the total cost of credit. For example, borrowing a sum over a longer term means smaller payments but usually more interest overall, because you owe money for longer.
| Term | Monthly payment | Total cost |
|---|---|---|
| Shorter | Higher | Usually lower |
| Longer | Lower | Usually higher |
Fixed and variable rates
With a fixed rate, the interest stays the same for the term. With a variable rate, the lender can change it, and your payments or the length of the debt may change. Credit cards and overdrafts usually have variable rates, and personal loans are commonly fixed.
Fees to look for
- Arrangement or account fees, which are included in the APR if compulsory.
- Late payment or missed payment charges, which are not included in the APR.
- Early repayment charges, which are limited by law for consumer credit.
- Cash advance fees on credit cards.
Interest-free periods
0% offers can be useful only if you can clear the balance in time. When the offer ends, the standard rate usually applies to what is left. Some deferred-interest deals charge interest back to the start if you do not clear the balance in time, so read the terms carefully.
How to compare
Compare the same amount over the same term. Look at the total amount repayable and the monthly payment, then ask whether you could still pay if your income fell. Check whether the lender is authorised (how to check) and understand the rules on your rights. For short-term credit, the cost is capped, as explained on our price cap page.
Where to get a second opinion
MoneyHelper has free tools and guidance for working out affordability. If you are already struggling, see free debt help.
A worked example, in words
Imagine two offers for the same amount. One has a lower monthly payment because it runs for twice as long. The second has a higher payment but ends sooner. If the interest rate is the same, the longer loan will almost always cost more in total, because interest is charged on the balance for more months. The lender must show you the total amount repayable before you sign, so put the two figures side by side. Ask yourself whether the lower payment is worth the extra total cost, and whether you might be tempted to extend the term further later.
Common traps
- Choosing on the monthly payment alone.
- Treating a 0% offer as free when a fee or balance transfer charge applies.
- Assuming the advertised rate will be the rate you are offered.
- Forgetting that missed-payment fees sit outside the APR.
This is general information, not financial advice. We're not a lender or broker and don't arrange credit.
Frequently asked questions
Is a lower APR always cheaper?
Usually, if the amount and term are the same. A lower APR over a much longer term can still cost more in total, so check the total amount repayable.
What does representative APR mean?
It is the rate that at least 51% of successful applicants must receive. Your offered rate may be higher.
Is APR the same as the interest rate?
No. APR also includes compulsory fees, so it can be higher than the interest rate alone.