APR vs interest rate: which number to compare

The interest rate is the yearly cost of borrowing the balance. The APR (annual percentage rate) is the interest rate plus compulsory fees, such as an arrangement fee, expressed as one yearly rate, so it is usually the higher number. Compare loans by APR; exactly which fees count depends on local rules. To see the monthly cost of a loan, use the loan calculator.

Two loans are both advertised at 8%. One has no fees; the other charges an arrangement fee. They are not the same price, and the interest rate alone cannot tell you that. The APR, or annual percentage rate, can.

The difference

• Interest rate (sometimes called the nominal rate) is the rate charged on the money you owe. It decides the interest part of each payment.
• APR expresses the total cost of borrowing, interest plus compulsory fees, as a single yearly rate. It is the rate that would produce the same cost if there were no fees.

Worked example

You borrow 10,000 at 8% over three years. The monthly payment is 313.36. The lender also charges a 300 arrangement fee, taken from the loan, so you receive 9,700 but repay as if you had borrowed 10,000.

Paying 313.36 a month for 36 months on 9,700 actually received is the same as borrowing at about 10.1%. That is the APR. On a shorter loan, the same fee pushes the APR up even more, because it is spread over fewer months.

What APR includes, and what it leaves out

The rules vary by country and type of loan, but APR generally includes interest and fees you must pay to get the loan, such as arrangement or origination fees. It usually leaves out optional extras, late-payment charges and early-repayment fees. For mortgages, some countries publish a separate figure for the overall cost over the whole term, because introductory rates make a single APR misleading.

Representative APR

Adverts often quote a “representative APR”. In the UK, for example, that is the rate that a set share of successful applicants receive. Others may be offered more. The rate you are actually offered after applying is the one to compare.

How to compare loans

1. Compare APRs for loans of the same amount and the same term.
2. Check the total amount payable. It is the plainest figure: the sum of all payments plus fees.
3. Check what happens if you repay early, especially if you expect to. A low APR with a large early-settlement fee may cost more than a slightly higher APR with none.
4. Watch for flat-rate quotes, which make the headline rate look much lower than the APR.

Check the payment yourself

Enter the amount, rate and term in the Loan Calculator to see the payment and total interest. To find the effective rate including a fee, enter the amount you actually receive and adjust the rate until the payment matches the lender's quote; that rate is close to the APR. The EMI Calculator works the same way for monthly instalments.

APR on savings

Savings accounts quote a related figure, usually called AER or APY, which shows the yearly return including compounding. The Compound Interest Calculator shows it as the effective annual rate. For loans quoted as a flat rate, see flat vs reducing balance interest.