When you borrow money or take out a credit card, you’ll often see the APR and interest rate listed side by side. They might look similar, but they’re not the same. The interest rate is the cost of borrowing the money itself, while the APR shows the total yearly cost, including any extra fees.
Knowing the difference can help you understand what you’re really paying and choose the best deal for you.
The interest rate is the basic cost you pay to borrow money. It’s a percentage of the amount you borrow and doesn’t include any extra charges.
Example:
If you borrow £1,000 at an interest rate of 5% a year, you’ll pay £50 a year in interest.
The interest rate only tells you what you’ll pay for the loan itself, not for any added fees.
APR stands for Annual Percentage Rate. It shows the full cost of borrowing each year by including:
✅ The interest rate
✅ Extra charges, like setup or annual fees
APR gives you a clearer picture of what you’ll really pay overall.
Example:
Your credit card has a 20% interest rate, and a £20 annual fee. The APR will be higher than 20%, because the APR includes that fee.
For mortgages or secured loans, you might also see something called APRC (Annual Percentage Rate of Charge). This works like APR but also includes future interest rate changes – so it’s especially useful for products with variable rates. APRC helps you estimate the total cost over the full term of the loan, even if the rate isn't fixed.
When you’re comparing loans or credit cards, APR makes it easier to see which option is cheaper overall. The interest rate alone can be misleading, especially if there are hidden fees.
With APR, you can:
✔ Compare the true cost of different offers
✔ Avoid surprises from unexpected charges
✔ Make better choices for your budget
Here’s an easy way to remember the difference:
✅ Interest rate – The cost of borrowing money, shown as a percentage
✅ APR – The total yearly cost of borrowing, including the interest rate and any agreed fees
When you’re thinking about a loan or credit card:
Understanding the difference between APR and interest rate can help you feel more confident when borrowing money. By looking beyond the interest rate and checking the APR, you can spot hidden costs and choose what’s best for you.
Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.
Fiona is a personal finance writer with over 7 years’ experience writing for a broad range of industries before joining Ocean in 2021. She uses her wealth of experience to turn the overwhelming aspects of finance into articles that are easy to understand.
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