APR (annual percentage rate)

APR, or annual percentage rate, is the yearly cost of borrowing expressed as a percentage. It includes standard charges as well as interest, which is what makes it useful: a loan or a credit card can be compared against another like-for-like, because the figure isn’t just the headline interest rate a lender chooses to advertise.

What it includes

APR bundles interest together with the mandatory standard charges that come with taking out the credit, such as arrangement or administration fees the lender requires as a condition of the loan. This is why the APR quoted on a loan or card can come out higher than the interest rate printed alongside it. The interest rate alone tells you what the lender charges for the use of the money; the APR tells you what the borrowing actually costs once the compulsory extras are folded in. Optional add-ons a borrower chooses rather than the lender requires aren’t part of this calculation, so check exactly what a lender has included before comparing two APR figures.

For anyone weighing up two borrowing options, the APR is the number to line up side by side, not the interest rate. Unpaid balances can also attract compound interest on debt, where interest is charged not only on what was borrowed but on interest already added, so the true cost of carrying a balance can grow faster than a flat APR figure suggests.

Not to be confused with

APR and AER answer different questions, and mixing them up is a common source of confusion. APR describes what borrowing costs: it’s the rate attached to loans, mortgages and credit cards. AER, the annual equivalent rate, describes what savings pay. One direction each. If a rate works out what you owe, it’s an APR question; if it works out what you earn, it’s an AER question.