APR, or annual percentage rate, is the yearly cost of borrowing on a loan or credit card shown as a percentage. It combines the interest rate with any compulsory fees, so it reflects the total price of credit measured across a single year.
In one line: APR folds interest and mandatory fees into one yearly figure so credit deals can be compared on a like-for-like basis.
How APR works
Lenders must quote an APR under the Consumer Credit Act 1974 and Financial Conduct Authority rules so borrowing costs can be compared consistently. The figure assumes the debt runs for a set term with repayments made on schedule.
On a 5,000 GBP loan at 12.9% APR repaid over three years, the rate is applied to the reducing balance each month and adds roughly 1,030 GBP in interest across the term. A card advertised at 24.9% APR would cost far more on the same balance carried month to month.
Because both interest and fees are baked into one number, a low headline rate with high fees becomes directly comparable to a higher rate with none.
APR vs interest rate
The interest rate is only the charge for using the money. APR is wider because it also captures compulsory product fees, so it is usually equal to or higher than the stated interest rate.
For credit cards the advertised rate is a representative APR based on a standard assumed balance, which is why the personal rate offered after a credit check can differ from the figure in the advert.
Primary source: Consumer Credit Act 1974 (legislation.gov.uk)