What is an APR?

If you have ever considered taking out a credit card or personal loan, you will have no doubt come across the term “APR”.

It is important to understand what an APR means before you apply for credit, as it allows you to make a more informed decision. Here we explain what an APR is and how you should use it.


What does APR mean?

APR stands for “annual percentage rate”. Simply put, it represents the total cost of borrowing over a year. APR is the official rate used by lenders to explain the cost of borrowing before you apply for a loan or credit card.


How do APRs work?

The “annual percentage rate” applies to personal loans, credit cards and other forms of credit such as store cards and hire purchase.

An APR takes into consideration:

  • The rate of interest
  • When interest is charged (daily, weekly, monthly or yearly)
  • Additional charges like introductory fees

An APR does not include penalty fees such as late payment or over limit charges.


Why are APRs important?

APRs are essential to easily compare the cost of borrowing across different providers to make sure you get the best deal. One of the most important things when comparing different loans and credit cards is to make sure you look at the APR and compare the total amount you would have to pay back.


What is a representative APR?

The cost of borrowing varies from person to person depending on a variety of factors including credit profiles. With a representative APR, at least 51% of accepted applicants will receive the advertised rate, or lower. The other 49% of accepted applicants may get a higher APR.

So, for example, if a loan provider was advertising a representative APR of 10%; at least 51% of borrowers will receive an APR of 10% or less. The other borrowers could receive an APR of more than 10%. Lenders sometimes advertise their range of APRs (minimum and maximum), alongside a representative APR.


What is a personalised or exact APR?

Many lenders, including RateSetter, advertise a representative APR, but also allow you to get a quote which gives you the exact APR, personalised to you, before you apply.

To provide the quote, RateSetter, as some other lenders, conduct a ‘soft search’ on your credit file, which does not impact your credit score. It is always good to check before starting the process whether your lender offer this soft search option. After receiving your quote, there is no obligation to apply for a loan, but you can be certain of the cost of borrowing if you do choose to apply.


What is a variable APR?

A variable APR applies to most credit cards. It means your annual rate of interest can change over time. Personal loans usually have a fixed annual rate of interest, so the APR will not change over the life of the loan.


What affects the APR I receive?

There are number of factors that impact the APR:

Your credit file: lenders will look at your credit file to understand the likelihood of you repaying a loan or credit card on time and in full. Usually, your APR will be higher if there is a greater risk or probability of you not repaying the money you borrow. For example, past missed payments could be an indication that you may miss payments in the future.

The amount you borrow: typically, the more you borrow the lower the APR.

The term of your borrowing: the length of time you borrow money for can change the “annual percentage rate” you receive.