What’s the difference between interest rate and APR?

Simply put, interest rate is the amount you’ll be charged over a year for borrowing the principal amount and the APR includes any additional fees you’ll be expected to pay as part of the lending agreement.

Whilst APR and interest rate both indicate how much you’ll need to pay back in total when you take out a loan, the two represent different things.

Understanding the difference between interest rate and APR is particularly important when applying for a loan as you’ll need to know how much you’ll be expected to pay back in total.

Which is more important — APR or interest rate?

Using the APR rather than the interest rate when comparing personal loans gives you a better idea of how much your monthly repayments will be.

At Novuna Personal Finance, we don’t charge any fees. This means the APR and interest rate will be the same when you take out a loan with us. You can use our online loan calculator to get an idea of how much you can borrow and estimated monthly repayment costs.

What is interest rate?

Interest rate is essentially the amount you’ll be charged for borrowing money. It is usually a percentage of the total amount you wish to borrow.

As interest charges are added to the total amount payable, you usually pay off interest as part of your monthly repayments rather than in one lump sum. This helps to make paying interest costs more manageable.

Some finance products, such as mortgages, have variable interest rates which can change every year. Personal loans, however, tend to have fixed interest rates so interest charges will stay the same for the entirety of the term. This helps you to better manage your monthly outgoings, as you know exactly how much you’re expected to pay back each month and when.

Our guide on personal loan interest rates goes into even more detail.

Why do interest rates fluctuate?

Interest rates often rise in response to inflation. To find out more, our guide on how to inflation-proof your finances could be a useful read.

What does APR mean?

APR stands for ‘Annual Percentage Rate’. It represents a combination of interest rate and any additional fees included with your loan to give you a more accurate repayment figure.

If there are no additional charges, such as application fees, the APR remains the same as the interest rate. At Novuna Personal Finance, there are no fees or surprise charges, so the interest rate and APR will be the same if you apply for a loan with us.

How does APR work?

APRs provide a clearer understanding of what you’ll repay when borrowing money — including all additional fees.

For example, let’s say you want to take out a personal loan with us for £7,500 at 6.4% APR over a term of 60 months. As we don’t charge additional fees, you will only need to repay interest costs so the total amount payable will be £8,745, or £145.75 per month.

The above is called a representative example. It gives you an idea of how much borrowing money could cost based on the rate at least 51% of applicants are offered. The APR used on representative examples may not be the rate you’re offered though so, to get a personal rate, you’ll need to complete an application form which will involve a hard credit check.

Your APR and interest rate questions answered

Why is APR usually higher than interest rate?

The APR is usually higher than the interest rate as it includes all associated costs and fees. However, if you choose Novuna Personal Finance as your personal loan provider, you can rest assured you won’t be charged any additional fees so the APR and interest rate will be the same.

What is a good APR?

A good APR for a personal loan would be below the current average interest rate.

Scoring a ‘good’ rate will be determined by several factors including your current financial circumstances, credit history, loan amount and term.

Here are our top tips for improving your chances of getting a better APR rate on your personal loan:

  • Pay your bills on time. Missed payments can hurt your credit score and could make you look financially unreliable.
  • Don’t borrow too much if you don’t need to. High debt amounts can have a negative impact when you apply for credit.
  • Build up your credit history. Whilst too much debt can have a negative impact, having no track record can make it tricky for lenders to know how you’ve handled debt in the past. Paying for your mobile phone, utilities or credit card monthly can be beneficial.
  • Register on the electoral roll under your current address.
  • Make sure the information in your credit report is correct. If you spot anything that isn’t right, get in touch with the company or credit reference agency to get it sorted.
  • Don’t apply for credit too often. Every hard search will be noted on your credit report, which can result in a higher APR or even a declined application.

For more information, read our guide on improving your credit score.

How will I know if I’m being shown interest rate or APR?

The APR you’re quoted once you’ve completed an online application form should include interest charges and all incurred fees. Unless there are any additional fees, the APR will be the same as the interest rate.

Credible lenders will always be upfront about any additional charges or fees — or, in our case, there are no fees at all — so there’s no need to worry about any nasty surprises.

Get a low-cost personal loan with Novuna Personal Finance

With competitive rates from as low as 7.4% APR Representative (£7,500-£25,000), you can make your dreams a reality sooner thanks to our personal loans.

Borrow between £1,000 and £35,000 to help you buy a car, make some home improvements or plan the wedding of the year. Apply now to get your personal rate and find out how much it could cost you to borrow the cash you need.


Written by

Tara Covell

Wednesday 28th December 2022

More articles we think you'll enjoy