What the APR includes
The APR covers the interest and any fees you must pay to get the credit, such as an arrangement fee. It’s worked out from the timing of every payment, so a fee paid at the start pushes the APR up more than the same fee spread over the loan. It doesn’t include charges you can avoid, such as late payment fees.
Because the formula is set by the FCA’s rules (CONC App 1.2), every lender’s APR means the same thing. That’s what makes it useful for comparing.
Why the monthly rate isn’t APR ÷ 12
The APR is an annual rate that already includes the effect of interest building on interest during the year. So the monthly rate is the one that, compounded 12 times, gives the APR:
monthly rate = (1 + APR)1/12 − 1
| APR | Monthly rate | APR ÷ 12 |
|---|---|---|
| 6.9% | 0.5576% | 0.5750% |
| 9.9% | 0.7898% | 0.8250% |
| 24.9% | 1.8701% | 2.0750% |
Dividing by 12 overstates the interest, more so at higher rates. Using the true monthly rate reproduces lenders’ own published examples to the penny: Lloyds and Halifax quote £10,000 over 48 months at 7.4% APR as £240.21 a month, £11,530.08 in total, and that’s what the formula gives.
Representative APR
An advert that shows an interest rate must show a representative APR with a worked example. The lender only has to give that rate to at least 51% of the people who take out the credit because of the advert (CONC 3.5). Up to 49% can be offered a higher rate, based on their credit history and circumstances.
So treat an advertised rate as a guide. The rate that counts is the personal APR on your own quote or agreement. Many lenders offer a quote with a soft search, which doesn’t affect your credit file, before you apply.
Comparing loans
A lower APR means less interest for the same amount and term. But the term matters as much as the rate. £10,000 at 6.9% APR costs:
- over 36 months: £307.36 a month, £1,064.96 of interest
- over 60 months: £196.56 a month, £1,793.60 of interest
The longer loan is easier each month but costs £728.64 more. Compare the total amount payable, not just the monthly payment, and check whether you can overpay or settle early without a charge.
APR on credit cards and car finance
Credit cards show a purchase APR, usually much higher than a loan’s, and the same monthly-rate formula matches card providers’ own figures. Car finance shows an APR and sometimes a separate “fixed rate of interest”. Lenders define that fixed rate in different ways, so use the APR to compare deals and in our calculators.