APR vs Interest Rate (UK): The Real Difference

APR vs Interest Rate: Why the Cheaper-Looking Loan Often Costs More

Two £5,000 loans over 36 months. One advertises 6.9%. The other advertises 8.9%. The 6.9% loan is the more expensive one by £84, and nothing on the front of the adverts tells you that.

The two loans, worked through

Same amount, same term, different adverts. I ran both through the repayment maths so the figures below are exact, not rounded guesses.

Loan A wins the advert and loses the wallet. The £250 fee is the whole difference, and only APR carries it into the headline number. Loan B costs £4.61 more every month, so it feels dearer when you look at the payment, yet it is £84 cheaper by the end.

What goes inside APR, and what does not

• In: the interest, arrangement or product fees that every borrower must pay, and any charge you cannot avoid to get the loan.
• Out: late payment fees, missed-payment charges, early repayment charges, and optional extras such as payment protection insurance that you can say no to.
• Spread over the term: APR assumes you borrow the full amount for the full term and pay on schedule. Pay it off early or borrow less and your real cost changes.

That last point trips people up. APR is a comparison tool built on a fixed scenario. It is not a promise of what you will pay.

Why the advert APR is not always your APR

Lenders can advertise a “representative APR”, which is the rate that at least 51% of people who get the product must actually receive. Up to 49% of approved applicants can be offered a higher rate. If your credit file is weak, expect to be in that 49%. The rate on the advert is the best case that most people get, not a guarantee for you.

The practical fix is to use a quote or eligibility checker. Those run a soft search, which leaves no mark on your credit file, and show the rate you would really be offered.

Credit cards and balance transfers

Cards quote APR too, but with a twist: the APR on a card is only paid if you carry a balance. Clear it in full each month inside the interest-free period and you pay nothing.

A 0% balance transfer card looks free until you see the fee. Move £3,000 for 18 months at a 3% transfer fee and you pay £90 up front. Paid off evenly over the 18 months, that fee is equal to an APR of about 3.9%. Still far cheaper than a 20% card, but not zero, and the “0%” in the advert does not include it.

If you only make the minimum payments on the old card, you pay mostly interest. See what that does to the balance in the Minimum Payment Trap Calculator.

Where APR is the wrong number

• Overdrafts. Since April 2020 banks have to charge one simple interest rate and no daily fees. They quote it as an EAR (equivalent annual rate). At 39.9% EAR, £500 borrowed for 30 days costs about £14.
• Payday and other high-cost short-term loans. The FCA caps interest and fees at 0.8% a day of the amount borrowed, default fees at £15, and total cost at 100% of the amount borrowed. A 30-day loan repaid on time cannot cost more than £24 per £100. APR on a 30-day loan looks enormous, and is nearly meaningless, so use the pound figure.
• Buy now pay later. Most of it has no interest and so no APR, but missing payments can bring late fees and a mark on your credit file. Zero APR does not mean zero risk.

A 60-second test before you sign

1. Write down the total you will repay, in pounds, for each offer.
2. Check the APR is the rate you would actually be given, not the representative one.
3. Ask whether there is an early repayment charge. If you might clear the loan early with a bonus or a refund, it can change which loan is cheaper.
4. Pick the lowest total, unless the monthly payment will strain your budget. A cheaper loan you miss payments on is the dearest one.

Questions people ask

More on this

• Missed the 0% Deadline: What Happens Next (UK)
• How to Check Your Credit Score for Free in the UK (2026 Guide)

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