Personal finance is full of confusing terms and acronyms, and the phrase APR is certainly one of them. Luckily, it’s not that hard to answer the question ‘what is APR?’
APR is short for annual percentage rate, it is the annual rate of interest you will be charged for borrowing. You will find it advertised on any type of lending products or services, such as, unsecured and secured loans, personal loans, mortgages, instalment loans, payday loans and credit cards to name a few.
Annual percentage rate (APR) explained
APR is the yearly percentage you will be charged to borrow money, and all financial products that lend you money must also show the APR rate so that you can fairly compare products.It will cost you more to borrow money on a credit card with a high APR than a card with a low APR.
Lenders calculate APR the same way,taking into account any additional fees and how often interest is charged into account. This makes it a great way to compare different financial products that would be normally difficult to compare.
How does APR work?
For example if you are borrowing £1000 on a credit card with a 12% APR, over the course of the year, if you paid nothing back, it will cost you £120. However, as you are likely to have to make some minimum repayment, the total interest you will actually pay will be less than this, over the course of the year.
APR is typically added to a debt on a monthly basis, to find a monthly interest rate simply divide the APR by 12. So carrying on from the example above, if the APR is 12% a monthly rate is 1% and if you borrow £1000 you will be charged £10 interest each month.
It is worth knowing that the longer you take for repayment, the lower the monthly cost is but the higher the overall interest paid
Is APR really important?
APR may sound like the only thing that you need when thinking about borrowing money or choosing a credit card but it’s not. Choosing a sensible form of borrowing depends entirely on your own personal situation, what you need it for, your credit history, and how quickly you are able to pay it back.
For example, if you have a poor credit history, you may struggle to find any lender or credit card company with a low APR. In fact, you may struggle to find any form of credit at all. Instead it would be better for you to choose a so-called credit builder card that has a high APR. This works by borrowing a little on it and repaying everything in time to avoid interest payments, and allowing you to build your credit file. To find out more about credit read our current guide on credit and how to improve your score.
Rather low APR products are best for steady and planned borrowing. For example like a mortgage, that requires you to pay back a fixed amount in regular instalments.