What is APR and how is it different from the interest rate?
The interest rate is what the lender charges on the money you owe. The APR (annual percentage rate) is the interest rate plus most of the compulsory fees, expressed as a single yearly percentage — so it represents the total cost of borrowing rather than just the interest component.
An example makes the gap clear. Two mortgages both advertise 4.5% interest. One has no arrangement fee; the other has a £1,500 product fee. The interest rates are identical, but the APRs are not, and the second loan costs more. APR exists precisely so that two products with different fee structures can be compared on one number.
What APR includes varies by jurisdiction, but typically arrangement fees, booking fees and compulsory insurance. What it usually excludes is anything optional or contingent — late payment charges, early repayment penalties, and fees you can avoid.
Where APR is genuinely useful: comparing like-for-like loans of the same size and term.
Where it misleads:
Short-term borrowing. Annualising the cost of a 30-day loan produces enormous APR figures that are mathematically correct but hard to interpret.
Mortgages you will not hold to term. Advertised mortgage APRs assume you keep the product for its full life. If you have a two-year fix and intend to remortgage, the APR — which averages in the lender's standard variable rate for the remaining 23 years — tells you very little about what you will actually pay.
"Representative APR" on credit cards and loans means only 51% of accepted applicants need to receive it. The rate you are offered may be considerably higher, and you often do not learn it until after applying.
For credit cards, compare the purchase rate and the fee structure directly.