APR vs Interest Rate
The most common mistake borrowers make is confusing the interest rate with the APR. They are not the same thing.
The interest rate is the base cost of borrowing the money. It does not include any other charges associated with the loan or credit card.
The APR (Annual Percentage Rate) includes the interest rate PLUS all mandatory fees and charges (like an annual card fee or a loan setup fee). Because it includes everything, the APR will always be equal to or higher than the base interest rate.
For example, a credit card might advertise a 19.9% interest rate. But if that card has a £30 annual fee, the APR might be calculated as 27.3%. If you only looked at the interest rate, you would not see the true cost.
Representative APR Explained
When you see a loan or credit card advertised on TV or a comparison site, it will almost always say "Representative APR". This is a crucial legal term in the UK.
Under FCA rules, a lender only has to offer the advertised Representative APR to 51% of successful applicants. The remaining 49% can be offered a higher rate based on their credit score and financial profile.
Warning
Just because you are approved for a loan does not mean you will get the advertised 6.9% Representative APR. If your credit score is poor, the lender might approve you but charge you 15.9% instead. Always use a soft-search eligibility checker to see your personal rate before formally applying.
Fixed APR vs Variable APR
Credit products in the UK come with either a fixed or variable APR.
Fixed APR: The rate is locked in for the full term of the agreement. It will not change regardless of what happens to the Bank of England base rate or the wider economy. This gives you absolute certainty over your monthly payments. Most personal loans use a fixed APR.
Variable APR: The rate can go up or down. It is typically linked to the Bank of England base rate. If the base rate rises, your APR and monthly payments will likely rise too. Most standard credit cards use a variable APR.
Different Rates on the Same Card
A single credit card does not just have one APR — it has different rates depending on how you use the card:
- Purchase APR: The rate charged on everyday spending if you do not pay your balance in full each month.
- Cash Advance APR: The rate charged if you withdraw cash from an ATM using your credit card. This is almost always much higher than the purchase APR, and interest is charged from the moment you withdraw the cash (there is no interest-free grace period).
- Balance Transfer APR: The rate charged on debt moved from another card. This is often 0% for a promotional period.