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Which of the following is the cheapest way to borrow money: a £5,000 loan at 22% interest with no fees, or a £5,000 loan at 20% with a £300 up-front fee?

The above probably reads like the sort of maths problem we hoped we’d left behind in secondary school. Happily, APRs are designed to avoid these problems altogether - an APR is a single, easy-to-compare number that allows you to compare the cost of credit easily.

They’re one of the most important tools in your arsenal when it comes to finding the right loan for you.

In this article, we’ll explain what a representative APR is, how it works and how you can use these figures to make sure you understand exactly how much you’re paying for credit.

If you’re new to personal loans, you might want to take a look at our main guide before you get started: what is a personal loan?

If you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com, representative 27% APR. We’ll be explaining representative APRs in this article.

What is an APR?

APR stands for annual percentage rate. When you borrow money, whether that’s through a loan, a credit card or an overdraft, you pay interest. But as well as the interest payable, you might also face fees that are included automatically for some credit products - such as an origination fee or an annual account fee.

So APR gives you a truer figure for the total amount you’ll repay, as a percentage of your loan. What’s more, it’s a figure which you can compare across different types of borrowing.

Let’s try a simplified example. Let’s say you borrow £1,000 for a year, and are charged an interest rate of 10% with no fees. At the end of the year, you’d have repaid £100, which is 10% of £1,000. 

Let’s make things more complicated. You borrow the same loan amount - £1,000 - for a year and are charged a lower rate of 9%, but with a £20 application fee. Is that a better deal? Well, at the end of the year you’d have repaid £90 in interest plus the £20 application fee. That’s £110, or 11% of the original amount. Not such a good deal!

Now let’s make things really complicated. You spend £1,000 on your credit card, which is interest-free for the first six months but then carries an interest rate of 18%. It also has a £50 fee each year. At the end of the year, you’d have repaid roughly £90 in interest during the last six months, plus a £50 fee. That’s £140, so you’ve repaid 14% (1) of the principal.

The above are very simplified examples, designed to show the key feature of an APR, which is that it is comparable across different forms of unsecured credit, such as personal loans and credit card debt. In practice, APRs are more complex, because of the way loans are repaid. If you’re curious, we’ll explain how they’re calculated below - but if you don’t want to go into the nitty-gritty, you’ll already know enough based on the above.

The fine detail

A note: it’s impossible to explain this without getting quite technical - if you’re curious, read on; but if not, feel free to skip the next two paragraphs!

Interest calculations are actually pretty complex. If you borrow that £1,000 and repay at 10% interest, you’d only repay 10% if you repaid it all in one lump sum at the end of the year. In practice, you’ll repay a little each month, and the amount you owe will decrease throughout the loan term.

Since interest is only charged on what you owe, the interest payable on the amount you borrow will also decrease each month too. Lenders have to do some pretty complex calculations to reflect this and also to account for the fact that your repayments should be fixed - i.e. they won’t fluctuate month to month. 

All that happens under the bonnet - but here’s a real-world Koyo example (representative - more on that later!):

Representative example: Borrow £4,000.00 for 36 months. You’ll have a fixed interest rate of 22.44% per year. You’ll make 35 scheduled monthly payments of £154.20 and a final payment of £153.83. The total amount payable is £5,550.83. Representative 24.9% APR.

An APR does all that hard work for you, making it much easier to compare across different products.

What is a representative APR?

This one’s pretty straightforward. When you apply for an unsecured loan or credit card (this doesn’t apply to some forms of secured loan), the lender calculates an APR that’s specific to you. 

So a representative APR is similar to an “average” APR, or one which most people could reasonably expect to get.

To be specific, it’s a rate which 51% of people accepted will be eligible for. Of course, you might fall into the 49% who would pay more, but you can have a reasonable expectation that you would pay this amount or close to it if approved.

Representative APRs tend to feature on adverts or homepages - when you apply for a loan, you’ll get your personal rate.

What is a representative APR used for?

The main function of an APR is to allow borrowers to compare the true cost of different forms of borrowing. That includes credit cards, as well as different types of loans.

It also factors in compulsory fees. Koyo doesn’t charge any fees, and with us, there are no prepayment penalties (meaning that it’s always free to repay your loan early), but many other lenders include charges for things like applying for credit or keeping your account open.

Importantly, APRs are useful not just for loans, but also for credit cards. However, there are some catches when it comes to credit card APRs that you should be aware of.

Credit card APRs

A credit card can be much more or less expensive than advertised depending on how you use it. For example, if you pay the balance off in full every month, you’ll pay no interest at all. If you make only the minimum repayments, you’ll face a much higher interest rate.

So to calculate the APR on a credit card, lenders make some assumptions - the main one being that you have an outstanding balance of £1,200 from day 1, and pay it back in equal, monthly instalments over a year without spending anything else.

Here’s an example, comparing two real-world offers:

Product

Borrowing amount/credit limit*

Representative APR

Annual fee

Notes

Koyo personal loan with 1-year term (2)

£1,500

28.9% (fixed)

£0

Interest rate is fixed

Barclaycard (3)

£1,200

21.9% (variable)

£0

Interest rate may vary.

Assumes you spend £1,200 on day 1 and then repay it in monthly instalments

* With personal loans, the interest rate (and APR) tends to decrease with bigger loan sizes. £1,500 is the smallest loan offered by Koyo, and therefore carries a higher rate of interest. Larger loan sizes have lower interest rates and APRs (e.g. borrowing £12,000 would give 18.9% representative APR).

How can you get the best APR on a personal loan?

As we’ve explained above, a personal rate is set based on your own circumstances. That means you do have some influence over it: in this section, we’ll look at what you can do to reduce your rate, whether you’re looking for a debt consolidation loan, a credit card to fund a significant purchase or an overdraft to get you through a tricky month.

Build up your credit score

One of the key factors that lenders take into account when calculating your personal rate, alongside your current financial situation, is your credit history. As a rule of thumb, borrowers with a good credit report are more likely to repay their loan in full, which makes them less of a risk for lenders. That means that lenders can charge them a lower rate of interest.


Building up your credit score is a long-term effort, but for some people, some quick fixes can make a short-term difference too. Experian, one of the UK’s 3 credit reference agencies, has a good guide to the steps you can take.

Shop around

You can also get a lower APR by shopping around for the best deal. When doing so, there are two things to remember. First and foremost, when you apply for any form of credit, a lender will carry out a credit check. 

This can be a hard or a soft credit check - the former leaves a trace on your credit file, and too many of these (particularly rejections) in a short space of time can act as a red flag for lenders. So when shopping around, you should avoid making too many applications, and if you’re rejected, stop and use an eligibility calculator to avoid damaging your credit rating.

The second thing to remember is that the rate that lenders display on their websites or promotional materials will be a representative APR. That makes it a good guide to the rate you’ll get, but you should be mindful that the rate you get might vary. 

To get a broader view of personal loans and how they work, take a look at our full guide to personal loans.

Consider different forms of credit

One of the great things about APRs is that you can use them to compare different forms of credit. So, if you’re considering a personal loan, APRs are a great way to get a sense of the comparative cost of credit versus a credit card, for example. If you’re flexible about your requirement, that can be a good option.

Further reading and FAQs

Hopefully, the article above has helped you to understand how APRs work, and how they can help you get the best deal on a personal loan.

This article is part of a series of guides explaining different aspects of personal loans. You can also read more in the following articles:

If you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%

Frequently asked questions about representative APR

What is a good representative APR?

The big question! APR varies according to the type of lending - the most competitive personal loans for less than £3,000 have an APR of around 8 or 9% (4). However, APR is only a guide to price - when considering a loan, you should also consider things like the repayment structure.

What is the difference between a fixed and a variable APR?

Generally, with a personal loan, your APR will be fixed, meaning that the interest rate won’t change while you’re paying back. That’s not always true of credit cards, where the provider can decrease or, more typically, increase rates over time. Your credit card provider must give you notice though, and it should be explained in clear language which also explains your options.

What is the difference between fixed interest rate and representative APR?

We’ve covered representative APR above - APR available to each individual borrower will be slightly different, so lenders use a “representative APR”, which is available to at least 51% of applicants, to act as a benchmark.

A fixed interest rate is one that does not fluctuate - a good example is a fixed-rate mortgage, which unlike a tracker mortgage is “locked in” for an agreed period. Generally, personal loans will have a fixed interest rate, while the rate payable on credit cards may change.



Footnotes:

(1) Credit card interest is a little more complex than this, since it can compound daily, but this is pretty close as a representative example.

(2) https://www.koyoloans.com/

(3) https://www.barclaycard.co.uk/personal/credit-cards/representative-example-explained

(4) https://www.moneysavingexpert.com/loans/cheap-personal-loans/

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