The short version
General information, not advice
- Interest is the cost of borrowing money
- APR includes interest plus compulsory fees
- Representative APR applies to 51% of approved applicants
- Higher credit risk usually means higher APR
- The lowest APR advertised may not be the rate you receive
See it step by step
What borrowing really costs
Step 1 of 6
Interest: the price of borrowing
When you borrow, the lender charges interest. It is usually shown as a percentage of the amount borrowed.
The guide’s example: borrow £1,000 at 10% interest for one year and you would repay £1,100.
A fixed rate stays the same for the whole agreement. A variable rate can rise or fall, which makes it less predictable.
Rules and worked examples from the Switch4Good guide, APR and interest rates explained, checked 4 October 2026: they are the guide's own statements, not independently checked. Example figures are illustrative: the slider settings, the 20% compounding rate, the £10,000 three-year loan in the fee step and the 10% and 15% offers in the last step are examples, not quotes. Sums charge a twelfth of the yearly rate each month and treat any fee as paid at the start; official APR calculations follow a set formula, so real figures can differ a little. General information, not financial advice.
When you borrow money — whether through a credit card, loan, overdraft, or car finance — the lender charges interest.
APR (Annual Percentage Rate) is designed to help you compare borrowing costs. But many people misunderstand what APR includes, how it is calculated, and how it affects what they repay.
This guide explains interest rates, APR, representative APR, variable rates, and how to calculate the true cost of borrowing.
This is general information, not personal financial advice.
What Is Interest?
Interest is the amount a lender charges for letting you borrow money.
It is usually shown as a percentage of the amount borrowed.
For example:
If you borrow £1,000 at 10% interest for one year, you would repay £1,100.
Interest can be:
- Fixed (does not change during the term)
- Variable (can rise or fall)
- Simple (calculated only on original amount)
- Compound (calculated on the balance including previous interest)
Most consumer credit products use compound interest.
What Is APR?
APR stands for Annual Percentage Rate.
It shows the yearly cost of borrowing, including:
- Interest
- Arrangement fees
- Mandatory account charges
APR is designed to help you compare different products.
For example:
Loan A: Interest 6% £200 arrangement fee APR 7.4%
Loan B: Interest 6.5% No fee APR 6.5%
Even though Loan A has a lower interest rate, its APR is higher because of the fee.
APR provides a more accurate comparison.
Representative APR Explained
Under FCA rules, lenders must show a "Representative APR" in advertising.
This means:
- At least 51% of approved customers must receive that rate or better
- Up to 49% may receive a higher rate
Your actual rate depends on:
- Credit score
- Income
- Employment status
- Existing debts
- Affordability checks
The rate advertised is not guaranteed.
Fixed vs Variable Rates
Fixed Rate
- Interest does not change during the agreement
- Predictable monthly payments
- Common for personal loans
Variable Rate
- Can increase or decrease
- Linked to lender discretion or Bank of England base rate
- Common for credit cards and overdrafts
Variable rates carry more uncertainty.
APR on Different Products
Credit Cards
APR often between 20%–30% Interest charged monthly on outstanding balance
If you pay in full each month, you usually avoid interest.
Personal Loans
APR often 5%–15% depending on credit profile Fixed monthly repayments Interest built into repayment schedule
Overdrafts
APR can exceed 35% Charged daily Often expensive long-term borrowing
Buy Now Pay Later
May advertise 0% interest Missed payments can trigger high interest or fees
How Interest Is Calculated (Example)
Example:
Borrow £5,000 APR 10% Term 3 years
You would repay roughly £161 per month Total repayment approx £5,796
Total interest cost approx £796
Small APR differences significantly change total repayment.
At 15% APR, total interest could exceed £1,200.
Always check total repayable amount.
What Affects the APR You're Offered?
Lenders assess risk.
Higher risk = higher APR.
Factors include:
- Missed payments
- High credit utilisation
- Short credit history
- High debt-to-income ratio
- County Court Judgments (CCJs)
Improving your credit profile can reduce borrowing costs.
Why APR Can Be Misleading
APR assumes:
- You keep the loan for full term
- You make all payments on time
- No additional fees occur
If you miss payments:
- Late fees may apply
- Promotional rates may be withdrawn
- Interest can compound
Always read full terms.
FCA Rules on Credit Advertising
The Financial Conduct Authority (FCA) regulates consumer credit.
Lenders must:
- Display representative APR clearly
- Conduct affordability checks
- Avoid misleading promotions
- Explain total repayable amount
Check a firm is authorised:
Financial Conduct Authority Website: https://register.fca.org.uk Phone: 0800 111 6768 Email: consumer.queries@fca.org.uk
Key takeaways
- APR includes interest and mandatory fees
- The advertised rate is not guaranteed
- Small APR differences greatly affect total repayment
- Fixed rates provide certainty
- Compare total repayable amount, not just monthly payment
Common questions
Is APR the same as interest rate?
No. Interest rate excludes fees. APR includes interest plus compulsory charges.
Why was I offered a higher APR than advertised?
Representative APR applies to 51% of approved applicants. Your credit profile may result in a higher rate.
Does 0% APR mean free borrowing?
Only if you repay before the promotional period ends and avoid fees.
Is a lower monthly payment always better?
Not necessarily. Longer terms reduce monthly payments but increase total interest paid.
Can I repay a loan early?
Often yes, but early repayment charges may apply. Check your agreement.
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