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Everything you need to know about APR

It’s on every credit card and loan advert wherever you look: APR. Everyone sees it, everyone has heard about it, but what is an APR?

In this guide we’ll give you everything you need to know: 

What is an APR?

APR, or annual percentage rate , combines a loan or card’s interest rate with any standard charges to give you the cost of borrowing. 

While it doesn’t include extra fees – such as fees for using your card to take out money at a cash machine – it means you can get an idea of how much it will cost and allows you to compare the cost of credit offered by different providers.

You’ll be told what the APR of your credit card or loan will be before you sign a credit agreement. That means you’re not in the dark about what the cost of your borrowing may be, as lenders are legally required to tell you. 

The lower the APR, the less you’ll have to pay back on any borrowing, while a higher APR means higher charges. 

What is an APR used for and how does it work?

Think of APR as a way to compare the cost of taking out a credit card or unsecured loan. APR is shown as a percentage of the amount you’re borrowing and is used to give you an idea of how much it’ll cost you to borrow money. Where your interest rate purely shows the interest you'll be charged, the APR includes interest plus any standard charges you’ll have to pay, such as an annual fee for the product.

Let’s go through a very basic example of how it works in practice.

APR example on a credit card

Let’s say your credit card has an APR of 20% and you borrow £5,000 for a year. To calculate your average monthly interest charges, you would do the following calculation:

  • Start by multiplying the balance (5,000) by your APR percentage (20% or 0.20) to find out the total interest and charges you’ll need to pay over a year = £1,000
  • Then divide the interest (1,000) by 12 months to see how much interest and charges you’ll pay per month = £83.3333*

However, remember that because credit card interest is typically calculated on a daily basis based on your outstanding balance, any repayment, spending and charges will change your balance, and this will impact the interest you are charged.

APR doesn’t cover additional charges like:

  • Penalty fees such as late payment fees
  • Fees for cash advances
  • Additional fees or charges for using your card abroad

When working out how much you’ll pay, you should read the terms and conditions provided to you, as these will explain any possible extra fees. 

It’s also important to note that if you pay your full balance off on time each month you won’t pay any interest at all. But if you continue to spend on your credit card without paying it off, the balance on which the interest is charged will grow – meaning you’ll pay more back in interest. 

For example, if you had £500 on your card to pay off but ended up spending another £200 so the total was now £700 and interest was charged at 10% you’d then owe an additional £70 per year. 

APR on a loan

The APR on a loan works in the same way. So, for example:

Amount borrowed: £20,000 for home improvements

Term: 3 years (36 monthly payments)

APR: 5.4%

Interest rate: 5.4%

Repayments: Around £601 per month (including interest and fees)

Total amount paid back over 3 years: £21,666 

*These are general examples and not designed to be representative of any products offered by Sainsbury’s Bank.

What isn’t included in a credit card APR?

Sometimes, when learning what APR is, it’s worth looking at what it isn’t.

Typically, lenders quote the Purchase APR on their products, which is the APR on any spend you make across retailers, be that online or in-store. However, be aware that your balance is made up off all types of transactions, and each of these will have their own APR to reflect the cost of borrowing. These include:

  • Balance transfers  – this is when a user rolls their debt from one credit card to another, to reduce or avoid potential interest charges. Credit cards will have a specific APR for balance transfers, and this is often the same as the purchase APR, but you should check individual product T&Cs. 
  • Money transfers – when transfer money from your credit card as funds directly into your bank account.
  • Cash withdrawals – when you withdraw cash, you’re no longer making a purchase, and this comes with its own rates and rules. Cash APRs are usually higher than the purchase APR, and this can also apply to money transfers.
  • Certain fees and charges – fees associated with late payments, exceeding your credit limit, or returned payments may not be included in the representative APR and may have their own terms. Annual fees may still be included.
  • Promotional rates – credit cards with an initial 0% interest (such as some balance transfers) will have an APR that kicks in after a certain period of time. Repaying all the balance before the promotion ends means you will pay no interest.

These can be subject to their own rules, with some credit cards designed specifically to be used in these ways. Always check your lender or credit card’s terms and conditions, so you’re not caught out by hidden or differing charges.  Balance transfer fees may apply.

What are the different types of APR?

There are two different types of APR:

  • Representative APR
  • Personal APR

They’re less different than you might think, but the terms crop up a lot when browsing for credit cards and loans.

Representative APR

When you’re browsing loans and credit cards, you’ll often come across the term ‘representative APR’. While the interest rate can be different, depending on an individual’s personal circumstances, the advertisements are based on what most customers will get.

To advertise a representative APR, at least 51% of customers will receive the advertised rate.  

However, all product features such as length of promotional periods and fees can change depending on individual circumstances.

Personal APR

Personal APR is the rate calculated specifically for you and your own individual circumstances. That means the amount you want to borrow, your current financial situation, credit history and any personal information can influence this number.

Your personal APR can be different to an advertised representative APR. This may seem confusing but think of it this way:

  • Representative APR is the rate offered to 51% of customers, representing what most people will get.
  • Personal APR is made specifically for you, after considering your application and the information you provide. 

What is a good APR?

There’s a lot that goes into determining an APR. That means what’s ‘good’ may vary based on the current economic situation, your own personal circumstances and the product itself.

APR is also influenced by the cost of supplying the product. For example, very small loans have higher APR due to the high costs of providing the loan verses the loan size. Meanwhile, large/long-term loans are higher cost than medium loans due to funding considerations and risk.

Your credit score is another important factor for APR. The better your credit score is, the greater your chance of securing good interest deals on loans and credit cards you take out. Essentially, the more stable you appear, and lower risk, the higher the likelihood of being offered a lower APR. 

Helpful credit card guides

Credit card glossary

Credit card glossary

Understand credit limits, balance transfers and more.

apply for a credit card

How to apply for a credit card

Learn how to apply and what to consider beforehand.

Using your credit card abroad

Using your credit card abroad

Learn how to manage your credit card while on holiday.

Frequently asked questions

How does an APR affect me?

APR is the cost you pay each year to borrow money, represented as a percentage. It can give an idea of the amount you could pay on loans and credit cards, depending on:

  • When you pay
  • Terms of repayment
  • Instalments you pay

Is it better to have a higher or lower APR?

Offers vary, but if two credit cards are identical in their terms and conditions (including any fees) then a lower APR is generally better. You can use the APR as a starting place to compare two deals, alongside looking into any additional benefits or disadvantages before applying.

Do I pay interest on my credit card if I pay on time?

You won’t have to pay interest if you pay back your outstanding balance every month, on time. If not, then any payments you make will be used first to pay off any transactions on which lenders charge the highest interest rate, then those charged at the next rate – and so on down to the lowest rate of interest.

Want to learn more about APR and credit cards in general? Check out our support and FAQs page.