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Interest and APR - the basics

Wed 01 January 2014

This section gives you a brief introduction to Interest and APR and how they can affect you.

Interest and APR explained

Interest is the fee that you are charged when you borrow money. It is usually a percentage of the whole amount that you borrow. Often, interest is displayed as an "Annual Percentage Rate" (APR).

APR means, in short, how much your loan will cost you over the course of a year, taking into account what your interest rate is, how often you pay interest and what fees are associated with the loan.

All lenders are required by law to display their APR on their products. This allows customers to make a fair comparison and weigh up all their options.

How interest rates can differ

Interest rates will vary based on a number of factors. An important one is what your individual credit score is like. Typically you may be charged higher interest if you have a poor credit score, because the lender is taking more of a 'risk'. Money Advice Service has more information on this.

The method of borrowing you choose also has an effect on the amount of interest you are charged; a credit card, for example, may have a different interest rate to a loan or an overdraft. This will vary from lender to lender.

Additionally, the interest rate is likely to change depending on how much you borrow and how long for. A small short term loan is likely to have a different interest rate to a longer term loan.

There are lots of things which contribute to the final interest amount, and it is important to always be aware of interest rates when taking out a loan.

Personal and representative APR

There are two sorts of APR - Personal and Representative. Representative APR is shown on advertisements, and is the APR that the majority of customers who see the advertisements should be offered.

Personal APR is what your individual APR will be over the year. In most circumstances, it may be the same as the Representative APR, but it could be different.

Always make sure that you are comfortable with the amount of interest you will be charged before committing to a loan.

Fixed and variable interest rates

Interest rates are either fixed rate or variable, and it is important to know what yours will be before taking out a loan.

Fixed rate interest means that the amount of interest you pay does not change over the course of your loan - so you know how much you're paying and for how long.

Variable interest means that the rate you pay can fluctuate over the course of your loan. The changes in interest rate can be very small or quite significant depending on the market at the time.

Money Saving Expert has a great Interest Rates Guide which will help you discover more about different types of interest.

How APR is useful for you

APR can be a useful tool for comparing credit products, particularly when you're comparing two products which are like-for-like. APR assumes a loan term of a year, so if your loan is for a shorter term it is worth looking at additional features too, such as fees, charges and repayment options to help you make your decision.