Annual Percentage Rate (APR)

Two loans with the same interest rate can cost different amounts if one charges extra fees. APR aims to roll the main costs into a single yearly percentage so borrowers can compare offers on a like-for-like basis.

For example, Loan A charges 7% interest with no fees. Loan B charges 6.5% interest but adds an arrangement fee. Once the fee is spread across the life of the loan, Loan B's APR might be 7.3%, making it the more expensive choice even though its headline rate is lower.

What APR includes depends on local rules and the type of product. It usually covers interest and compulsory fees for arranging the loan, but may not include optional extras or penalty charges such as late fees.

APR is mainly a borrowing measure. In many places, it does not fully reflect the effect of compounding within the year. A credit card with an APR of 24% that compounds monthly actually costs a little more than 24% a year if the balance is carried. For savings products, the comparable measure is the annual percentage yield, which does include compounding.