APR vs interest rate: what's the difference?
Written by
Emily Tye
Reviewed by
Amy LancashireThe interest rate is the base cost of borrowing money, expressed as a yearly percentage. APR (Annual Percentage Rate) is broader: it includes the interest rate plus any compulsory fees, also expressed as a yearly percentage. Because APR captures the full cost of a product, it is the more useful figure when comparing borrowing options from different lenders.
What is an interest rate?
An interest rate tells you what percentage of the amount you borrow will be charged as interest over a year. For example, if you borrow £1,000 at an annual interest rate of 20%, you would owe £200 in interest over the year before any repayments are factored in. It does not include any fees the lender charges.
Note, this is a simplified illustration – in practice, interest on most credit products accrues daily and compounds over time.
For a detailed look at how interest accumulates on a credit card, read our guide on how credit card interest is calculated.
What is APR?
APR stands for Annual Percentage Rate. It combines the interest rate with any compulsory fees and expresses the total cost of borrowing as a yearly percentage. Lenders in the UK are required by the Financial Conduct Authority (FCA) to show APR in their credit advertising so that borrowers can compare products on a like-for-like basis.
For a full explanation, see what APR means on a credit card.
What is the difference between APR and interest rate?
The difference comes down to fees. If a lender charges no additional fees, the APR and the interest rate will be identical. Where fees apply (an annual credit card fee, a loan arrangement fee, or a broker fee), these are folded into the APR, pushing it above the interest rate.
| Interest rate | APR |
|---|---|---|
What it measures | The cost of borrowing the principal | Interest rate + compulsory fees |
Includes fees? | ❌ | ✅ |
Best used for | Calculating interest charges | Comparing products side by side |
Example: A credit card has a 24.9% interest rate and a £25 annual fee. The annual fee is factored into the APR calculation, so the card's APR will be higher than 24.9%. A card with the same interest rate but no annual fee would show an APR of 24.9% – the same as the interest rate.
This is a simplified illustration. Actual APR calculations follow a standardised formula set out in FCA rules.
Is APR the same as the interest rate?
Sometimes. For products with no fees, which is the case for many credit cards, APR and the interest rate are the same figure.
Where fees apply, APR will be higher. This includes credit cards with annual fees, personal loans with arrangement fees, and mortgages with associated product fees.
Which should I use when comparing products?
Use APR when comparing products from different lenders. Two products with the same interest rate but different fees will have different APRs, which is exactly what makes APR the fairer comparison tool.
Use the interest rate when you want to understand how much interest will accrue on your balance, or to estimate your monthly repayment.
In short: APR is for comparing; interest rate is for calculating.
Representative APR vs your personalised rate
The APR a lender advertises is the representative APR. Under FCA rules, this must be the rate offered to at least 51% of approved applicants. Up to 49% of approved applicants can be offered a different rate, based on their individual credit profile and circumstances.
This means that when you compare products by their advertised APRs alone, you may not be comparing what you would actually be offered.
Instead, you can use a credit card eligibility checker or loan eligibility checker to see a personalised rate before you formally apply. These use a soft search that has no impact on your credit score and isn't visible to other lenders.
This allows you to compare your personalised APR, which is a more accurate comparison than relying on representative APRs alone.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
