What is APR?

Wollit Team4 minute read · Updated 2nd July 2024

APR (or Annual Percentage Rate) is the total cost of borrowing money for a year. It includes both the interest charges and any fees associated with the loan. You can think of it as what you actually pay for a loan, not just the headline interest rate you see in an advert.

What’s a representative APR?

Representative APR is the rate usually advertised by lenders. The word “representative” tells you that most of their customers get an APR similar to this.

Representative APRs, however, can sometimes be misleading.

First, when Bank of England interest rates are low, companies in competitive industries will sometimes offer very low APRs on their credit products, such as 0% on car loans or lease options. The problem is that these low APRs are often only available for a short period of time on the loan. If you don’t repay the loan fully in that time then it will move to a higher APR.

Second, representative APRs are often lower than the actual cost of a loan. That’s because the calculations for representative APRs assume you’ll be repaying your loan over a long period of time. This makes the one-time fees spread across multiple years. Think of it this way: the annual costs of mortgage closing costs will seem much smaller when those costs are spread over 30 years instead of 10.

Also, it’s essential to remember that you won’t always be offered the representative APR. The APR you will get is called “personal APR,” and it is based on your credit history, credit score, and many other factors.

So, while the representative APR gives a general idea, your actual rate could be higher or lower.

Is personal APR the actual cost I will pay?

It might seem that representative APR is an advertised cost and personal APR is the actual cost. But that’s not always the case. Your personal APR can also be a bit misleading. This often happens with mortgages.

First, you will encounter APRs when shopping for adjustable-rate mortgages (ARMs), also called tracker mortgages. The formula will assume that the interest rate stays constant – nobody knows the future, and the lender has to use a number in there.

And because the interest rate on an ARM will change when the fixed-rate period is over, the APR estimate that your bank gives you can be much lower than your actual borrowing costs if mortgage rates rise in the future.

Second, many mortgage APRs may exclude charges like appraisals, titles, life insurance, notaries, document preparation, and other one-time fees. All this may make it hard for you to compare similar mortgages because different lenders will include or exclude some of these fees. To compare mortgages accurately, you must ask about these costs, not just APR.

What does variable APR mean?

If you visit any credit card provider website, you’ll often see APR quoted like this: “34.95% APR (variable)”.

Variable means that the rate isn’t fixed and can change in certain circumstances:

If you miss your monthly payments,
If you max out your credit card limit,
And it will also move in line with the Bank of England base rate.

In other words, your credit card APR will also increase when the Bank of England raises rates – for example if it needs to cool down inflation.

That doesn’t mean you have no control over your APR. Many credit card providers and lenders offer fixed-rate APRs. If you’re concerned about potential interest rate increases, these cards and loans may be a more predictable option.

You can also ensure that your APR does not increase by making all repayments on time and, if you have a credit card, not exceeding your limit. When you miss a credit card bill, not only will your credit score suffer, but you might also lose any promotional deals you were on—including promotional rates and fees.

How is APR related to credit score?

APR and credit score are pretty closely linked: your credit score directly affects the interest rate you get on loans and credit cards.

A higher credit score usually means lenders might offer you a lower APR, as they see you as less risky. The opposite is also true: lower credit scores often lead to higher APRs since lenders worry about default risk.

This is why maintaining a good credit score is essential – it can increase your loan approval chances, help you secure lower APRs, and reduce borrowing costs.

How can I improve my credit score to get a lower APR?

To boost your credit score and maybe get a lower APR, you should go through this checklist:

Check your credit report at least once a year. Errors in your credit report can hurt your credit score, so if you spot anything odd, contact the credit reference agencies as soon as possible.
Pay your bills on time. This applies not only to credit card bills but to any bill—from mobile phone bills to mortgage repayments. This shows you’re a reliable borrower, and it’s the main thing influencing your credit score.
Don’t max out your credit cards. Experian says to keep your credit utilization (how much you borrow compared to how much you “could” borrow) to under 25%. Otherwise, lenders might think you’re struggling, which might lead to higher APRs to compensate them for this risk.
Register to vote. Being on the electoral register validates your identity and address, boosting your credit score and chances of securing a lower APR.
Avoid making too many loan applications at once. Experian recommends not having more than two “hard credit checks” in any six months. If you want to know whether you qualify for a loan, use an eligibility checker instead. These won’t hurt your credit score.
Be careful who you apply for a loan with. For example, if you’re applying for a joint mortgage with your spouse, your credit history is linked to the other applicant. Help them improve their score so your joint application has a higher chance of getting a lower APR.
Build your credit history. If you have a limited credit history, use small amounts of credit responsibly to establish a track record of making repayments over time.

One way to do this is by downloading a credit-building app like Wollit. Wollit helps you build your credit history by reporting your monthly subscription to credit reference agencies as loan repayment. If you’re a tenant, it also reports your regular rent payments to Experian, helping you build a history of paying your bills on time.

These things can increase your chances of securing a lower APR and ensuring that you pay less than you need to.