What is the difference between APR and interest rate?

When comparing loans, credit cards, or other forms of borrowing, you will often see both an APR and an interest rate listed. While they’re closely related, they’re not the same thing. Understanding the difference can help you make more informed borrowing decisions.

Before taking out any form of credit, it’s worth reviewing our guide on what to know before borrowing online, which explains key terms, costs and affordability checks in more detail. Read on here to get a high-level overview of APR and interest rates, seeing how each can affect the cost of short-term borrowing.

In this guide:

• What is APR?
• What is an interest rate?
• APR vs. interest rate: What’s the difference?
• Examples of APR and interest rates in practice
• How APR and interest rate affect short-term loans
• Summary and further support
  

What is APR?

APR stands for annual percentage rate. It’s designed to show the total cost of borrowing over a year, expressed as a percentage. APR includes not just the interest charged on a loan, but also most of the mandatory fees associated with taking it out.

Because APR takes additional costs into account, it’s commonly used to help borrowers compare different credit products on a like for like basis. This is especially useful when loans have different fee structures or repayment terms.

You can read a more detailed explanation in our dedicated guide, What is APR?, which explores how APR works across different types of borrowing.

How APR is calculated

APR is calculated by combining the interest rate with certain compulsory charges and spreading the total cost over 12 months. These charges may include:

• Arrangement or setup fees
• Administration fees
• Some compulsory account charges

Optional extras, such as late payment fees or payment protection insurance, are not usually included in the APR number.

For short-term loans, APR can appear very high because the borrowing period is much shorter than a year. This does not necessarily mean the loan is more expensive in cash terms, but it does highlight why APR should always be considered alongside the total amount repayable.

The Financial Conduct Authority requires lenders to present APR clearly so that consumers can better understand and compare borrowing costs.

What is an interest rate?

An interest rate is the percentage charged on the amount you borrow. It represents the cost of borrowing money, excluding most additional fees. Interest can be charged in different ways depending on the product, such as daily, monthly or annually.

Interest rates are often shown as a simple percentage, for example 25% per year. Unlike APR, this figure does not usually include fees or charges that may apply when you take out the loan.

For a deeper explanation, our guide What are interest rates? looks at how interest works across different types of credit.

How interest rates work

Interest rates determine how much extra you pay on top of the original amount borrowed. How they affect your repayments depends on several factors, including:

• Whether the rate is fixed or variable
• How often interest is applied
• The length of the loan term

For short-term borrowing, interest may be charged daily or calculated across the agreed repayment period. This is why understanding how interest is applied is just as important as knowing the headline rate.

APR vs. interest rate: What’s the difference?

The main difference between APR and interest rate is what they include.

The interest rate shows the cost of borrowing the money itself. APR shows the overall yearly cost of borrowing, including interest and most mandatory fees.

APR is useful for comparing products, especially when fees vary between lenders. Interest rates are useful for understanding how the balance grows over time.

This distinction is particularly important when comparing short-term loans or payday loans, where fees and repayment structures can differ.

Examples of APR and interest rates in practice

Loan A has an interest rate of 30 percent with no fees.
Loan B has an interest rate of 25 percent but includes a £30 arrangement fee.

Loan B may appear cheaper based on interest alone, but once the fee is included, its APR could be higher than Loan A’s. APR helps highlight this difference by factoring in both interest rate and fees.

For short-term borrowing, the total amount repayable is often more meaningful than APR alone. This is why responsible lenders should always clearly display both.

How APR and interest rate affect short-term loans

Short-term loans and payday loans are typically repaid over weeks or months rather than years. Because APR is calculated over a full year, it can look disproportionately high even when the actual cost of borrowing is relatively small.

When considering short-term borrowing, it’s very important to look at:

• The total amount you will repay
• The repayment schedule and instalment amounts
• Whether the loan fits your budget

APR still plays a role, but it should be considered alongside these practical factors. Our guide on how to compare loans explains what to look for when reviewing different options. If you’re exploring options like payday loans, understanding both APR and interest rate can help you assess affordability more accurately.

Summary and further support

The difference between APR and interest rate lies in what each figure represents. Interest rates show the cost of borrowing money, while APR reflects the overall yearly cost including most fees. Both are important, but neither should be viewed on their own

When comparing loans, especially short-term borrowing, it’s essential to consider APR, interest rate, total repayment amount and affordability together. Understanding these figures can help you make more confident financial decisions.

For further independent guidance, there are plenty of third-party support organisations such as Citizens Advice, StepChange, MoneyHelper and National Debtline which offer free and impartial assistance, support and advice.

To continue learning, explore more guides on the Moneyboat blog covering responsible lending, financial wellbeing, credit checks and managing borrowing costs.