What's the difference between APR and interest rate?

Interest rate is just the percentage charged on borrowing. APR (Annual Percentage Rate) includes the interest rate PLUS mandatory fees and charges, giving the true cost of borrowing. APR is always equal to or higher than the interest rate alone.

Which is more important APR or interest rate?

APR is more important for comparing loans because it shows total cost. A loan with 5% interest but high fees could have higher APR than one with 6% interest and no fees. Always compare APRs when shopping for credit — it's the standardised comparison tool.

Why is credit card APR so high?

Credit cards are unsecured lending (no collateral), so lenders take more risk. APRs of 20-30% are typical. If you pay in full monthly, you pay no interest anyway. Credit cards are expensive for long-term borrowing — personal loans are cheaper.

What's representative APR?

Representative APR is the rate at least 51% of successful applicants receive. You might get a higher or lower rate based on your credit score and circumstances. The representative APR gives a reasonable expectation but isn't guaranteed.

APR vs Interest Rate — What's the Difference? | PocketWise

APR vs Interest Rate — What's the Difference?

Understanding APR and interest rates. How they're calculated, why they differ, and which to use when comparing loans, credit cards, and mortgages.

By PocketWise · 23 March 2026 · 3 min read

APR and interest rate are related but different. Understanding both helps you compare borrowing costs accurately.

Simple Explanation

Interest Rate

What It Is	Details
The base cost	Of borrowing
Percentage	Of amount borrowed
Doesn’t include	Fees and charges
Sometimes called	Nominal rate

APR (Annual Percentage Rate)

What It Is	Details
Total cost	Of borrowing
Includes	Interest + fees
Standardised	For comparison
Legal requirement	To advertise

Key Difference

Element	Interest Rate	APR
Interest	Yes	Yes
Arrangement fees	No	Yes
Admin charges	No	Yes
Compounding effect	Sometimes	Yes
Best for comparison	No	Yes

Why APR Matters

Same Interest, Different APR

Loan A	Loan B
Interest rate: 5%	Interest rate: 5%
£500 arrangement fee	No fees
APR: 6.2%	APR: 5.0%
More expensive	Cheaper

What’s Included in APR

Fee Type	Included?
Interest	Yes
Arrangement fee	Yes
Application fee	Yes
Compulsory insurance	Yes
Early repayment fee	No
Optional extras	No

Different Types of Loans

Personal Loans

Rate Type	What to Check
Interest rate	Base rate offered
APR	True cost
Representative APR	What most get
Personal APR	Your actual rate

Representative vs Personal APR

Representative APR	Personal APR
Advertised rate	Your actual rate
51%+ get this	May be higher or lower
Good credit scenarios	Based on your assessment
Starting point	Final figure

Example Variation

Applicant	APR Offered
Excellent credit	5.9%
Good credit	7.9%
Average credit	12.9%
Poor credit	Declined or very high
Representative	5.9% (majority got this)

Mortgages

Mortgage Rate Types

Term	Meaning
Initial rate	Rate during fixed/tracker period
SVR	Standard variable rate after
APRC	APR for mortgages
Overall cost	What you pay total

APRC Explained

APRC Includes	Example
Interest (whole term)	All years at different rates
Product fee	£999 arrangement fee
Valuation fee	If compulsory
Booking fee	If charged
Other mandatory	Required costs

Why Mortgage APR Looks Different

Scenario	Impact
2-year fix at 4%	Then SVR at 8%
APRC reflects	The higher SVR too
May look high	But includes worst case
Compare	Initial rates separately

Credit Cards

Credit Card APR

Type	Rate
Purchase APR	On spending
Cash APR	On withdrawals (higher)
Transfer APR	On balance transfers
Default APR	If you miss payments

Typical Credit Card APRs

Card Type	APR Range
Rewards/premium	18-25%
Standard	20-24%
Poor credit	30-50%
0% promotional	Then reverts to standard

Why Credit Card APR Is High

Reason	Explanation
Unsecured	No collateral
Higher risk	Lender exposed
Flexible	Borrow any amount
Convenience	Pay for it

Does APR Matter for Credit Cards?

How You Use It	APR Importance
Pay in full monthly	APR irrelevant
Carry balance	APR very important
0% deal ending	Check reversion rate

Calculating Cost

Simple Interest Example

Borrow £5,000	1 Year
Interest rate 6%	£300 interest
Total repay	£5,300
True cost	£300

With Fees Example

Borrow £5,000	1 Year
Interest rate 5%	£250 interest
Arrangement fee	£100
Total repay	£5,350
Effective APR	7%

Monthly Compounding

Factor	Impact
Interest calculated	Monthly not annually
Compounds	Interest on interest
APR accounts	For this effect
Nominal vs effective	Different calculation

Using APR to Compare

Like-for-Like Comparison

Loan Offer	APR
Bank A	7.2%
Bank B	6.8%
Bank C	7.5%
Best value	Bank B

What APR Doesn’t Show

Factor	APR Includes?
Early repayment charges	No
Flexibility	No
Customer service	No
Overpayment options	No

Beyond APR

Also Consider	Why
Can you overpay?	Reduce interest
Flexible payments?	Miss occasionally
Repayment term	Total interest
Total repayable	Actual cost

Special Cases

0% APR Offers

Offer Type	How It Works
0% purchase	No interest for period
0% transfer	On balance moved
After promotional	Reverts to standard
Read small print	Always

Hire Purchase

APR vs Flat Rate	Difference
Flat rate	Simple % on original amount
APR	Accounts for reducing balance
5% flat	≈ 10% APR
Always compare	Using APR

Overdrafts

Post-2020	Rules
Single APR	Required
No daily/monthly fees	Just APR
Easier to compare	With loans
Typically 35-40%	APR

Summary

Term	Use For
Interest rate	Basic understanding
APR	Comparing borrowing
APRC	Comparing mortgages
Representative APR	What you might get
Personal APR	Your actual rate

Key Rule	Always…
Compare APRs	Not just interest rates
Check what’s included	Fees matter
Look at total repayable	Full cost
Read terms	For hidden costs