APR vs interest rate: know the difference and what borrowing really costs

Which rate shows what you’ll actually pay?

When you compare borrowing options like personal loans and credit cards, you’ll usually find more than one rate displayed. You might spot a low interest rate and assume that’s the cheapest option. Then you notice the APR is higher. So which one should you go by?

You’re not alone if this feels unclear. These terms can trip people up. Here’s an easy way to understand the difference:

• The interest rate shows the cost of borrowing the money itself
• APR shows the total yearly cost of borrowing, including interest and compulsory fees

That’s why APR is the better number to start with when you’re comparing loans or credit cards.

Both rates matter. They just do different jobs. Once you know which one answers which question, comparing products becomes much easier. Let’s look at each in turn.

What an interest rate tells you

An interest rate is the basic price you pay to borrow money.

It’s shown as a percentage of the amount you borrow. For example, if you borrow £1,000 at an interest rate of 10%, you’ll pay £100 in interest over a year, before any fees.

Interest rates also apply to savings. If a savings account pays 4% interest, you’ll earn £40 over a year for every £1,000 you save.

You might see interest rates described as:

• Annual interest rate
• Rate of interest
• Annualised interest rate

They all mean the same thing.

Fixed and variable interest rates

Interest rates can be fixed or variable.

• A fixed interest rate stays the same for the whole term. Your repayments don’t change
• A variable interest rate can go up or down. This happens when a lender changes their rates

Interest rates are easy to understand, but they don’t include fees. That’s where APR comes in.

APR vs interest rate: the differences at a glance

Here’s a summary of the key differences between an interest rate and APR, to give a quick overview of what each tells you and when it matters.

Why fees can change the real cost

Fees are often the reason APR is higher than the interest rate. Two products can have the same interest rate but cost very different amounts once fees are included.

When a lower interest rate costs more

Imagine two loans:

• Loan A has a lower interest rate but charges a £200 arrangement fee
• Loan B has a slightly higher interest rate but no fees at all

Even though Loan A looks cheaper at first glance, Loan B could cost you less overall. APR helps you spot that difference.

When APR and interest rate are the same

Sometimes APR and the interest rate match. This means there are no compulsory fees.

In these cases, the interest rate alone gives a good picture of the cost.

Examples that show the difference

Here’s a simple illustration for both personal loans and credit cards.

How this works with real products

Personal loans

APR is especially useful for comparing personal loans. That’s because lenders don’t all charge fees in the same way.

A personal loan might include:

• An arrangement fee
• A product fee
• No fees at all

APR rolls these into one figure together with the interest rate, so you can compare loans more easily.

If you want to know the APR you could get on a Post Office Personal Loan, we can help with that.

Credit cards

Credit cards work a little differently.

The APR assumes you carry a balance for a full year. It includes:

• The purchase interest rate
• Any annual fees
• Assumptions about how quickly you repay

If you pay your balance in full every month, you won’t pay interest. In that case, APR matters less day to day. But if you carry a balance, APR becomes much more important.

Read our guide how credit cards work or find out more about the Post Office Credit Card.

APR, AER and savings rates

Is APR the same as AER on savings?

No. While interest rates do apply to savings, APR doesn’t.

Savings accounts use AER instead, which stands for Annual Equivalent Rate. It shows:

• How much interest you earn over a year
• The effect of compounding

Compounding is the additional interest you earn on the interest your savings earn, which helps them grow over time.

The simple way to remember the difference is:

• APR shows the cost of borrowing
• AER shows the return on savings

They’re designed for different purposes, which is why they aren’t interchangeable.

Common mistakes to avoid

Once you know the difference between an interest rate and APR, it’s easier to spot things that could catch you out.

• Focusing only on the lowest interest rate: A low rate can look appealing when you skim a comparison table. But it doesn’t show fees or other costs that affect what you actually repay
• Ignoring fees: Arrangement fees, annual fees or product fees can add up. Even small charges can make a noticeable difference over time, especially with longer borrowing
• Comparing unlike products: Loans and credit cards work in different ways. Comparing their rates directly can be misleading unless you understand how each product is meant to be used
• Thinking APR only matters for loans: APR also matters for credit cards if you carry a balance. In those cases, it gives a clearer picture of what borrowing costs over time

Knowing how interest rates and APR work together helps you make fair comparisons and avoid surprises later on.

How to compare products confidently

Use this simple approach.

1. Start with APR: It shows the overall yearly cost
2. Check the interest rate: It shows how the cost breaks down. Useful, but not the full picture
3. Look for fees: Arrangement or annual fees could push the APR up
4. Compare like for like: Only compare APR within similar products
5. Check the total repayable: This is essential for loans
6. Avoid assumptions: A low interest rate doesn’t always mean a low APR

You don’t need to calculate anything yourself. The rates are there to help you compare.