APR Calculator — True Interest Rate

The Annual Percentage Rate (APR) represents the total annual cost of borrowing, including interest and any mandatory fees, expressed as a single percentage. It allows you to compare loan products on a like-for-like basis even when they have different fee structures or compounding frequencies. That single figure is the reason a headline interest rate on its own tells you very little about what a loan actually costs.

In the UK, all consumer credit advertisements must show a representative APR under FCA rules. The representative APR is the rate that at least 51% of successful applicants will receive. Under CONC 3.5 the other 49% can be quoted a higher personal APR reflecting credit score, income, debt-to-income ratio and the size of the loan, so a headline 6.9% representative deal might reach you at 9-12% APR. A soft search through MoneySavingExpert, Experian or ClearScore shows your likely personal rate without marking your file.

This calculator works out the APR from what you borrow and what you repay. Enter the amount borrowed, the total of all your monthly repayments, the term in months and any upfront fee. It finds the monthly rate that links them and compounds it over 12 months, (1 + monthly rate)¹² − 1, which is how the FCA requires APR to be calculated, so it also turns a flat-rate quote into a true APR. Take £5,000 borrowed over 3 years at a 5% flat rate. The flat calculation gives £5,000 × 5% × 3 = £750 of interest, so £5,750 repaid at £159.72 a month, but because you are repaying capital throughout and never hold the full £5,000 for the whole term, the true APR comes out at 9.72%, close to double the flat rate.

Fees are the other reason the two figures diverge. APR spreads any compulsory arrangement, broker or admin charge across the term, so a £10,000 loan at 6% APR before fees, repaid at £192.59 a month over 5 years, works out at about 7.35% APR once a £300 arrangement fee is counted. The longer the term, the more thinly that fee is spread, which is why the same £300 on a 1 year loan at £859.93 a month pushes the APR to about 12.2%. Some loans advertise a low headline rate with no fee and recover it through monthly admin or insurance charges, and the APR is what exposes that.

Four similar acronyms do different jobs. APR is the true cost of consumer credit, interest plus mandatory fees. APRC applies to mortgages and folds in set-up fees and valuation costs across the life of the deal. AER describes savings, showing what you actually earn once compounding is counted. Credit cards are quoted with an APR too. EAR, the equivalent annual rate, was used for overdrafts, but since April 2020 overdrafts have had to be advertised with an APR as well. UK law requires APR or APRC on consumer credit advertising precisely so that these cannot be mixed up in marketing.

A low advertised rate is not always what it seems. An offer of up to 24 months at 0% may apply only to the first month before jumping to 39% APR, so check the full term as well as the rate. Balance transfer cards charge an upfront fee instead of interest, and a 24 month 0% transfer with a 3% fee works out at about 2.9% APR if you repay it in equal monthly instalments, or about 1.5% only if you clear it in one lump at the end of month 24. APR also excludes optional add-ons, so payment protection insurance, which since 6 April 2012 cannot be sold at the point of sale or as a single upfront premium, and any other insurance you do not need sit outside the quoted figure and should be declined.