APR explained: understanding the true cost of borrowing

A payday loan can show an APR in the hundreds or even thousands. That number matters, but it isn’t what you’ll actually pay. This guide explains what APR covers, what it leaves out, and which figure to check instead.

What is APR?

APR stands for Annual Percentage Rate. It's the yearly cost of a loan, shown as a single percentage, and every lender has to calculate it the same way. That's the point of it.

APR can look daunting, and it’s easy to mistake it for the actual cost of a loan. It’s only one factor. APR combines the interest rate and any compulsory fees into one percentage. That lets you compare loans side by side without adding up the fees yourself.

What's included in the APR?

• Interest charged across the whole term.

• Compulsory fees, such as set-up and arrangement or transmission charges you can't avoid.

• A broker fee, if paying one is a condition of getting the loan.

• Compulsory insurance or add-ons you aren't allowed to decline.

• The timing of your payments, because money later is worth less than money now.

What's left out of the APR?

• Default fees, which only apply if you miss a payment.

• Optional extras you chose to add.

• Fees for rescheduling or moving a payment date.

• The cost of a second loan or a top-up.

• Bank charges if a payment bounces at your end.

Two loans with identical APRs can end up costing very different amounts the moment something goes wrong.

What is representative APR?

Representative APR is an advertising rule, not a personal quote. At least 51% of people who take out the advertised credit must get that rate or better. That means up to 49% can be offered a higher rate, and the advert is still accurate.

It isn’t fixed, either. Representative APR moves as a lender’s typical customer and price change. The figure you see today may not be the one you see next month.

The representative APR shown across our site is 91%, based on the panel of lenders we work with. It tells you what most successful applicants get. It doesn’t tell you what you’ll get.

What is personal APR?

Personal APR is the rate you're offered on your own agreement, once a lender has looked at your application. It replaces the representative rate the moment you apply.

What affects your personal APR?

Several things affect the personal APR a lender offers you.

• Your repayment history, including any recent missed payments.

• How much unsecured credit you already carry.

• Your income against your essential outgoings.

• How much you want to borrow, from £50 to £5,000.

• How long you want to take to repay it.

• Which lender on the panel reviews your application.

• Whether that lender has lent to you before.

The rate that matters is the one in your pre-contract information and agreement, not the one on a homepage.

How does APR work?

APR is annualised. It shows what the loan would cost if you held it for a full year, even when you won’t. That’s what causes the confusion. A short-term loan’s cost is projected as if you kept re-borrowing at the same rate for twelve months.

Think of a short taxi ride. Price it per minute and stretch that rate over a year, and it looks extortionate. The fare hasn’t changed. Nobody takes a year-long taxi ride. A short-term loan works the same way. The annualised figure isn't what you'll actually pay.

That doesn't make APR pointless. It makes it a comparison tool rather than a price tag. For working out whether an agreement is affordable, use the total amount repayable instead.

What does APR apply to?

APR doesn't just apply to short-term loans. It also isn’t the only annualised measure you’ll see. Here’s how it differs from the others, and what each one tells you.

A credit card and a short-term loan can show very different APRs, and both can be calculated correctly. They cover different products over different lengths of time. Comparing the raw percentages across product types tells you very little. Logbook loans and rent-to-own agreements also quote an APR. With both, the real cost usually sits in the total amount paid.

What's a good APR for a loan?

There's no single "good" APR. It depends entirely on what you're comparing. A rate that looks high next to a mainstream credit card can be ordinary next to a short-term loan of a similar size and term, because the two products carry different risk and serve different purposes.

The only fair comparison is like-for-like: same amount, same term, same type of credit. Weighing a one-month loan's APR against a six-month card's APR tells you almost nothing, because annualisation distorts both figures differently. Our small loans, quick loans and same day loans are each built around a single amount and term for exactly this reason.

Rather than chasing a number, compare the total amount repayable on offers of a similar size and term. Two loans with very different APRs can land within a few pounds of each other once term is accounted for. Two loans with the same APR can differ by a lot.

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Representative example: Amount of credit: £500 for 6 months at £100.22 per month (final payment £100.21). Total amount repayable of £601.31 Interest: £101.31 Interest rate: 66.49% pa (fixed). Payday UK is a registered trading name of Payday Loans Ltd, who are an appointed representative of Flux Funding Limited, who are a credit broker, not a lender. Registered in England and Wales (Company number 12430457 / FRN 921539).

APR vs interest rate: what's the difference?

APR and "interest rate" get used as if they mean the same thing. They don't, and mixing them up is exactly why short-term loan APRs look impossible.

Why is the APR on payday loans so high?

Because the maths forces a short loan into a yearly figure. A payday loan is usually repaid within a month or two. APR still projects its cost as if you re-borrowed at the same rate for a full year. That compounding is what pushes the percentage into the hundreds or thousands, even when the pounds-and-pence cost is modest.

How to calculate your repayments

You can't reliably calculate your repayments from the APR alone, because the calculation compounds a rate that was never meant to run for a year. Trying to reverse it yourself is where the annualisation trap catches people out twice.

Use the numbers a lender has to give you instead:

• Ask for your pre-contract credit information before you commit. It's not optional, and a lender must provide it.

• Check the total amount payable. This is the true cost of the agreement, in pounds and pence.

• Check the repayment schedule: the number of instalments, the cost of each, and the exact dates.

The FCA price cap

Where a loan is high-cost short-term credit - an APR of 100% or more, and the credit due to be repaid within about a year - the FCA price cap applies: interest and fees cannot exceed 0.8% of the amount borrowed per day, default fees are capped at £15, and the total you repay cannot be more than twice the amount you borrowed. Both conditions have to be met: an agreement that meets only one of them is not capped, so always read the total repayable on your own agreement.

High-cost short-term credit means a loan with an APR of 100% or more that you repay within about 12 months. Other loans have no FCA price cap.

The cap is a ceiling, not a price. Many agreements cost less than the maximum, and a payment made to schedule usually means you never get near it.

When is borrowing the wrong answer?

Sometimes no loan fixes the problem and another one makes it worse. Treat these as stop signs:

• You would be borrowing to repay an existing short-term loan.

• You have already topped up or rolled over borrowing this year.

• The money is for a priority debt, such as rent, mortgage, council tax, energy or court fines. Those creditors have powers ordinary lenders do not, and there are better routes for them.

• Your essential outgoings exceed your income most months, not just this one.

• You are not sure you are claiming everything you are entitled to.

• You could not state the repayment date and amount without looking them up.

Common questions

Do early repayments change the APR on my loan?

Your APR doesn’t change. It’s a rate, not a total. What changes is how much you pay overall.

You can repay early at any time and pay less interest. No early repayment charge applies to loans arranged through us. Ask the lender for a settlement figure first. It can include up to 28 days’ extra interest.

Tell the lender the payment is a full settlement, not an extra instalment. Otherwise it may sit on the account while interest keeps running.

Is a lower APR always better?

Not always. It depends on how long you'd hold the debt, not just the rate.

A lower APR over a longer term can cost more in pounds than a higher APR over a much shorter one, because APR measures a rate, and cost depends on rate and time together. Compare the total amount repayable on offers with a similar term, not the APR on its own.

Is there a cheaper way to borrow money?

Often, yes, and our guide to alternatives to payday loans sets out the cheaper options to check first.

APR is a comparison tool, not a price tag. When you weigh up a short-term loan, let the total amount repayable decide, not the percentage.