Loans: the basics

The information in this guide was last updated on 26/02/2014

Where to get credit, how APR works and more

When you take out a loan, you pay the lender to give you the use of that money. What you pay is called interest, and you’ll pay this back in addition to the amount you’ve borrowed.

Interest is usually worked out as a percentage of your outstanding debt, and is paid every year or every month. So the more you borrow, and the longer you borrow it for, the more you’ll pay overall.

Regardless of the type of loan you take out, you’ll see the interest rate quoted as the Annual Percentage Rate (APR). This makes it easy to compare different loans by seeing how much you’ll be expected to pay back on top of the amount you borrow.

What is APR?

APR stands for Annual Percentage Rate. It is a standard way of describing the cost of a loan and is used across the UK to help you compare different credit products easily.

The APR takes into account how much you'll pay in interest on the loan, as well as any other fees and charges you'll have to pay. For example, the APR will include any setup fees and other costs associated with the loan.

Make sure you compare loans and check the APR to find the right deal for you.

Are there any problems with APR?

While it’s a good way to compare loans, there are a couple of things to bear in mind when it comes to APR.

  • On some loans, like a variable rate loan, the APR could change over the term of the loan.
  • If it is called a ‘Representative’ APR, that means that at least 51% of customers will get this rate. The other 49% of customers will get a different rate – usually a higher one – so it’s essential to check the APR offered on your loan agreement before you sign on the dotted line. Some providers will offer you an indication of the actual rate you’ll pay, without doing a full credit search – this is often called a ‘soft search’ or ‘soft quote’.
  • APR is still a useful tool to compare like with like across loans – just remember that it might not exactly represent what you pay.