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apr vs interest rates on loans and credit cards
apr vs interest rates on loans and credit cards

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The Difference Between APR and Interest Rates On Loans and Credit Cards

Delve into the differences between APR & interest rates, understanding their impact on loans and credit cards.
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When you're shopping for a loan or a credit card, you may see two different rates: the Annual Percentage Rate (APR) and the interest rate. Both are important to understand, but they're not the same thing.

This guide will break down the differences between APR and interest rates, as well as discuss other important factors to consider before signing up for a loan or credit card.

What is the interest rate? 

The interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed. For example, if you borrow £600 at an interest rate of 10%, you'll owe £660 at the end of the year.

What is APR?

The Annual Percentage Rate (APR) is the amount of interest you pay on a loan or credit card balance each year. This rate is usually calculated as a percentage of your outstanding balance and can be much higher than the interest rate you're charged on your monthly statement.

The APR is a broader measure of the cost of borrowing, including not just the interest rate but also any fees charged upfront. So, for example, if you took a £1,000 loan with an APR of 10% at the end of the year you would owe £1,052.22, based on monthly compound interest.

In general, loans with higher APRs will cost more than loans with lower APRs. That's because APRs take into account not just the interest rate but also any fees that are charged upfront. For example, let's say you have a credit card with an interest rate of 10%. That means you'll be charged 10% annually on any outstanding balances. 

However, if you don’t pay off your balance in full every month, you will end up paying interest on top of the interest you had to pay the month before. As an example, if you had a balance of £1,000 of which £100 was interest, and you only paid £90, the following month you would be charged interest on the £1,010 outstanding (at a cost of £8.42).  

It's important to understand the difference between APR and interest rates because they can have a big impact on the total cost of your loan or credit card debt.

what is interest rate

Factors that affect your APR and interest rate

Interest rates are generally lower for loans than they are for credit cards because with a loan you agree to repay the entire amount borrowed within a certain period, usually within five years. 

With a credit card, you only have to make minimum monthly payments, which means the credit card company can continue to charge you interest on the outstanding balance indefinitely. In addition, some credit cards charge annual fees and other fees that increase the effective interest rate you pay.

Here are some factors that affect your APR and interest rates:

Your credit score

A high credit score indicates to lenders that you’re a low-risk borrower, which could lead to a lower APR. A low credit score could lead to a higher APR.

The type of loan or credit card

As mentioned above, loans typically have lower APRs than credit cards because they’re considered less risky for lenders. E.g., a mortgage has equity attached and is over a significantly longer period of time meaning lenders can charge a lower interest rate.  However, a personal loan will typically have a shorter period (5 years let’s say) and will not be secured against an asset, therefore lenders will provide these at a higher APR.

Your income level

Lenders want to make sure that you’ll be able to pay back what you borrow. If you can demonstrate a higher income, lenders may offer you a lower APR.

Your debt-to-income ratio

This measures how much money you owe relative to your pre-tax income. The lower your debt-to-income ratio, the better chance you have of getting a lower APR.

The type of lender

Different lenders offer different APRs, even if they’re offering the same type of loan or credit card. So be sure to do some research on which one has the criteria that fits your needs and situation. Be sure to explore a variety of options - from banks to online lenders, like Creditspring.


What is APR on a credit card?

APR, or Annual Percentage Rate, on a credit card refers to the yearly rate charged for borrowing and represents the actual yearly cost of funds over the term of a loan. This rate includes any fees or additional costs associated with the credit card. When consumers shop for low interest rate credit cards, it's essential to consider the APR, as it provides a more comprehensive view of the card's borrowing cost.

What is APR on a loan?

The APR on a loan encompasses the yearly interest rate you would pay on the principal loan amount, plus any additional fees and costs. It provides borrowers with a clearer understanding of the true cost of borrowing, especially when comparing the lowest interest rate loans. While the interest rate itself only represents the cost of borrowing the principal amount, the APR gives a broader view, including any fees or charges.

What is representative APR?

Representative APR is the interest rate that a credit provider advertises on their financial product. It's the rate that at least 51% of their customers will receive. However, it's crucial to note that not everyone will be offered this rate. When lenders advertise their products, whether they're loans or credit cards, the representative APR provides a benchmark for comparison, ensuring transparency in the market. It helps consumers gauge the potential rates they might receive, though personal rates could be higher or lower depending on individual creditworthiness and other factors.


In conclusion, it is important to understand the differences between APR and interest rates when considering a loan or credit card. They are two different terms that describe the cost of borrowing money in different ways. APR takes into account not only the interest rate but also any fees associated with the loan or credit card. Knowing this information will help you make a more informed decision about which option is best for your financial situation.

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