Understanding APR
What is APR?
Annual Percentage Rate (APR) represents the total cost of borrowing over one year, including interest and standard fees. It provides a standardised way to compare credit products. UK regulations require lenders to display APR prominently so consumers can make informed comparisons.
Representative vs Actual APR
The advertised "representative APR" must be offered to at least 51% of approved applicants. The remaining 49% may be offered higher rates based on their credit profile. Your actual APR is determined after the lender assesses your application and credit history. The representative rate is not a guarantee of the rate you will receive.
APR Calculation
APR calculations include the nominal interest rate plus any mandatory fees, amortised over the loan term. The formula accounts for compound interest and fee timing. While complex to calculate manually, the key principle is that APR reflects the true annual cost, making products with different fee structures comparable.
Limitations of APR
APR assumes you keep the loan for its full term and make all payments on time. Early repayment, missed payments, or promotional rates can make the actual cost different from the APR. Additionally, variable-rate products may have APRs that change over time. Always read the full agreement, not just the APR figure.