Annual percentage rate (APR)
What is the annual percentage rate (APR)?
The Annual Percentage Rate (APR) is a calculation telling potential borrowers the total cost of a particular credit product, such as a loan, credit card, overdraft or mortgage. The idea is that consumers will be able to compare like with like when comparing one lender’s rates with another’s.
Where have you heard about the annual percentage rate (APR)?
In many jurisdictions, including the UK and US, credit providers must by law quote the APR rate on loan documents. The consumer and personal-finance media make frequent reference to APR when advising on the best deals. They also draw attention to the shortcomings of APR as a measure.
What you need to know about the annual percentage rate (APR).
The modern consumer-credit economy created a need for a measure that would tell people the true cost of borrowing and allow them to compare the rates on offer. Unlike the annual equivalent rate (AER), the APR includes other costs and charges, such as setting-up fees. It is often said that the APR, unlike the AER, does not include the effects of compound interest charged during the year. Traditionally, this was the case but an “effective APR” is often now calculated, which does so. APR is less useful for judging the cost long-term lending where rates can change, such as mortgages.
Find out more about the annual percentage rate (APR).
To learn more about percentage rates, what they tell you and how they can help inform credit decisions, see our definition of the annual equivalent rate.