Can a higher APR cost less overall?

Yes, a higher APR can mean paying less in total. The APR is the standardised annual cost of borrowing, and it is the figure lenders use to show the interest and additional charges you will pay on what you're borrowing, but it is not the whole bill. What you actually repay depends on the APR, the amount borrowed, the term and any charges the APR leaves out.

The APR stands for Annual Percentage Rate: the total cost of your borrowing for a year, including the standard fees and the interest you will have to pay¹. Lenders have to tell you what the APR is before you sign an agreement². But a loan taken over a longer period may have lower monthly payments while you pay interest for the whole time you owe the money, so you end up paying more overall³. A lower APRC often means a lower total cost over time, but it may involve longer terms or less flexibility⁴.

So the figure to compare is not the APR alone but the total amount repayable: the APR, the term, the amount borrowed and the charges outside the APR, read together. This page sets out what the APR includes, what it leaves out, and how the total cost of borrowing is worked out.

Yes, a higher APR can mean paying less in total

The APR is the figure lenders use to compare loans, and generally the lower the APR, the better the deal¹. That is the starting point, and for two loans of the same amount over the same term it holds. The APR is designed to be a like-for-like figure, so a lower one usually means a cheaper deal on identical terms.

Where it breaks down is when the terms are not identical. Taking a loan over a longer period may lower the monthly payment, but you pay interest for the whole time you owe the money, so you end up paying more³. A loan at a lower APR stretched over more years can therefore cost more in total than a loan at a higher APR repaid faster. The APR tells you the annual price of the money; the term tells you how many years you pay it.

The same caveat applies to mortgages. A lower APRC often means a lower total cost over time, but it may involve longer terms or less flexibility⁴. A deal with a lower overall cost for comparison can tie you in for longer or restrict overpayments, so the cheaper headline figure is not automatically the cheaper arrangement for your circumstances.

The practical rule is to compare the APR first, because it is standardised, then check the term and the total amount repayable before deciding. The APR is the right figure for the first cut. It is not the last word.

What the APR includes and what it leaves out

The APR includes the interest and account or application fees, shown as a percentage⁹. It is a way of presenting the interest payable on what you are borrowing, added up with other charges, such as arrangement fees¹⁰. For a mortgage, the equivalent figure, the APRC, is the total cost of your mortgage loan, including all costs, arrangement fees and interest charges, shown as a percentage rate¹¹.

What it leaves out matters just as much. The APR only includes compulsory charges⁵. It does not take into account charges you might have to pay, like a charge for missing your monthly repayment⁷. Payment protection, late payments and going over the credit limit may not be included¹². So a deal with a low APR can still cost more than the headline suggests if you miss a payment or exceed your limit.

The rules behind the calculation are set out in legislation. The APR is defined in the FCA Handbook as the annual percentage rate of charge for credit, determined under the CONC rules for credit agreements¹⁴. Where more than one rate is given, the APR is the positive rate nearest to zero or, if no positive rate is given, the negative rate nearest to zero¹⁵. The disclosure rules allow a small tolerance: a rate which exceeds the APR by not more than one, or falls short of the APR by not more than 0·1¹⁶.

Comparing the total amount repayable, not just the APR

The APR is a rate. The total amount repayable is a sum. To work out the cost of borrowing, look at both, and at the term that produces the sum.

For a mortgage, the APRC is the figure that shows the total cost over the full term, including all fees⁴. The interest rate on its own shows how much it costs to borrow money, expressed as a percentage and usually applying for a set period, while the APRC includes fees and any changes in rates over the entire mortgage term⁴. That is why the APRC is generally higher than the headline rate, and why it is the better figure for comparing the whole cost of a mortgage.

For personal loans, the same logic applies. A longer term lowers the monthly payment but raises the total interest paid³. The APR on the agreement is the standardised annual cost; the total amount repayable is what you will actually hand over. Read both.

Why is the APR higher than the interest rate?

The APR is generally higher than the quoted interest rate because it shows the true cost of the credit, folding in fees as well as interest¹⁷. The interest charges on credit are called the Annual Percentage Rate or APR, and it tells you how expensive the loan will be¹⁷. The interest rate alone shows only the cost of the money.

For overdrafts, interest is charged at a single annual interest rate (APR), which makes it easier to compare charges between accounts¹⁸. For credit cards, the APR uses the rate which applies to the way the card is most commonly used, usually the standard purchase rate¹⁹. Cash advances tend to be charged at a higher rate than purchases, and that higher rate is not the one in the headline APR¹².

The same principle explains why a savings AER can be higher than the gross rate: if your bank pays and compounds interest more than once each year, the AER will be higher than the gross interest rate²⁰. The APR and the AER are both standardised annual figures that fold in more than the headline rate, which is why they differ from it.

Is a credit card's APR based on the purchase rate only?

Usually, yes. APR calculations are normally based on the card purchase interest rate only⁹. For credit cards there can be different rates, so the APR uses the rate which applies to the way the card is most commonly used, which is usually the standard purchase rate¹⁹. A card's APR is the total cost of borrowing over a year, including the interest rate plus any standard charges such as an annual fee²¹.

That means the headline APR does not tell you the cost of every way you might use the card. Paying for foreign currency by credit card is a common example: not only will your card provider charge you a cash advance fee, most will also charge a higher APR and you will not get an interest-free period, even if the bill is repaid in full and on time¹³. The purchase APR does not cover that.

Credit card APRs vary widely, and the APR is the figure that lets you compare across that range, provided you check which rate the APR is based on and what it excludes²².

Why do payday loans show APRs of 300% or more?

Short-term payday loans often carry APRs of 300% or more⁶. Rates higher than 1,000 per cent APR are common²³. High-cost credit lenders typically charge 450 per cent to 2,500 per cent APR²⁴. The APR is a standardised annual figure, so a charge for a loan lasting a few weeks looks enormous when scaled up to a year.

Payday lenders must tell you what their annual percentage rate (APR) is before you sign a loan agreement²³. The APR is not hidden, but it is a poor guide to the cash cost of a very short loan, because the annual figure bears little relation to the few weeks you actually borrow for. The same is true of other high-cost secured borrowing: a logbook loan gives you cash quickly, but the APR is very high for the loan repayments, sometimes over 200 per cent¹.

Where do I find the APR and total cost before signing a credit agreement?

You will find your APR on your Pre-Contract Credit Information and Credit Agreement⁸. Lenders have to tell you what the APR is before you sign an agreement². The Pre-Contract Credit Information is the document that sets out the key figures before you commit; the Credit Agreement is the contract itself.

Read both together. The APR gives you the standardised annual cost, and the agreement sets out the total amount repayable, the term and any charges that fall outside the APR. The APR is denoted in quotations as "APR" or "annual percentage rate" or "annual percentage rate of the total charge for credit"¹⁶. If a figure in the agreement does not match what you were told, that is a point to raise before signing.

For overdrafts, firms must tell customers that a good way to compare the cost of an overdraft with other overdrafts or other ways of borrowing is to look at the APR, which shows the cost of borrowing over a year²⁷. The same principle applies across credit: the APR is the comparison figure, and the agreement is where the total cost lives.

What protects you, and where it stops

The APR is a regulated disclosure. Lenders have to tell you what it is before you sign², and the calculation and the tolerance allowed in quoting it are set in law¹⁶. The FCA Handbook defines the APR and the rules for working it out¹⁴. That gives you a standardised figure to compare, which is the main protection the APR offers.

Where that protection stops is at the charges the APR excludes. Late payment fees, payment protection and over-limit charges sit outside it¹², so a missed payment can cost more than the APR implies. If you are struggling with a debt, free and impartial help is available from MoneyHelper and from debt advice charities such as StepChange and Business Debtline²⁵. If you have a complaint about how a lender presented or applied the APR, the Financial Ombudsman Service can look at it; its guidance on interest awards sets the interest rate applied for late payment at simple interest at 8% per year²⁸.

The APR is the right figure to start a comparison with. The total amount repayable, the term and the charges outside the APR are what decide what you actually pay.