What’s the difference between APRs and Interest Rates?

Written by

Tara Covell

Monday 26th April 2021

Even though the interest rate and APR on a personal loan are commonly mistaken as the same thing, they’re not. So, understanding the difference is important when applying for finance.

The simplest way to explain the difference is – The interest rate is the amount you’ll be charged for borrowing the principal amount and the APR includes all incurred fees you’ll be expected to pay as part of the lending agreement.

Key Points:
  • Interest rate only covers the cost you'll pay for borrowing the principal amount whereas the APR includes all additional fees.

  • The APR is usually higher than the interest rate as it includes all associated costs.

  • 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.

What does interest rate mean?

Interest rates determine the amount you’ll have to pay when borrowing money and is applied to the loan principal amount.

Personal loans tend to have fixed interest rates meaning they will stay the same for the entirety of the term. In comparison, mortgages tend to have variable interest rates which can change every year.

What does APR mean?

APR or Annual Percentage Rate combines the amount of interest and any additional fees included with your loan, giving you a more accurate repayment amount. If there are no fees, the APR remains the same as the interest rate.

It’s good to keep in mind that credible lenders will always be upfront about any additional charges or fees, so there's no need to worry about any nasty surprises.

How does it work?

APRs provides a clearer understanding of what you’ll repay including all additional fees. For example, if you take out a personal loan with us for £7,500 at 3.2% APR over a term of 60 months, the total amount payable will be £8,117,40 or £135.29 per month.

We also don’t charge any fees so your 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 - the lower the better, however it will all depend on your credit report.

Scoring a ‘good’ rate will depend on several factors such as your credit history, current financial circumstances and the amount you want to borrow.

How to get a great APR rate on your personal loan

As we previously mentioned, the rate that you receive will be based on your credit history and personal circumstances, but there are some things you can do to make sure that you get a good deal.

  • Make sure to check your credit report periodically to ensure that all information is correct and for anything that isn’t, get in touch with the company or credit reference agency to get it sorted.

  • Pay all your bills on time as missed payments can hurt your credit score and make you look financially unreliable.

  • Keep your borrowing balance as low as you can as high debt amounts can impact negatively when you apply for credit.

  • Don’t apply too often as every hard search is will be noted on your report and can result in higher APRs or even declines. When comparing products, use comparison sites and double check that all searches are soft.

APRs are vital when it comes to comparing personal loans and being able to understand the fundamental differences between APRs and Interest Rates will help you choose the right product to meet your needs and budget.

Low Cost Personal Loans

Whether you’re looking to buy a new car, make some home improvements or just tidying up your finances our low-cost personal loans can help. You can borrow between £1,000 and £35,000 with competitive rates from as low as 3.6% APR Representative.

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