MSE’s Academy of Money
MSE’s Academy of Money

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

7.1 Annual Percentage Rate (APR): the key comparator for borrowing decisions

You’ve seen that borrowers must repay to the lender both the principal sum and the interest. On top of this there are often extra costs. Some come from ‘arrangement’ fees and intermediary (broker) fees when you get a loan in the first place and others, in certain circumstances, arise if you repay the loan before the end of the term.

The image is a photo of a car showroom with three cars in shot. The car on the right-hand side has ‘0% APR’ written in large print and underlined on the windscreen.
Figure 8 APRs are important when considering different ways of borrowing

Given these different potential charges, and the possible differences in the timing of repayments of borrowed money, it’s important to have a good means of comparing the total cost of debt on different debt products. Fortunately, there is a way to create like-for-like comparisons and assess which debt product is most appropriate. This is known as the Annual Percentage Rate (APR) of interest. This takes into account not only the interest rate charged on money borrowed but also when, and how often, interest is paid during each year. The APR also takes into account any other compulsory charges that are contractually part of a loan agreement.

While useful with loans and credit cards, an APR as a comparator is not infallible. On mortgages, for instance, it assumes you stick with that mortgage provider for the full term and pay the standard variable rate when an introductory rate ends. The reality is many people never pay that standard rate – as they tend to switch mortgage before it’s charged - so there is little to be gained from comparing a mortgage cost over 20 years or more.

Note that APR does not include:

  • optional charges, such as buildings insurance, that is not required as part of a mortgage package (though you don’t need to get it from your mortgage provider).
  • ‘contingent’ charges, such as early repayment charges, that depend on certain circumstances and that would become payable only in situations that are not applicable to all lenders.

Generally, a low APR means lower costs for the borrower. You will see the APR set out in posters and other advertisements for debt products, helping consumers to make comparisons between them.

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371