personal loan

What is APR on a Personal Loan?

March 17, 2022

What is APR on a Personal Loan?

Annual Percentage Rate is the interest you pay when you borrow money via a personal loan, credit card, or overdraft. In addition to the interest, certain credit products include costs such as an origination fee or an annual account fee.

So, APR offers you a better idea of your overall repayment as a proportion of your loan. It also allows you to compare different sorts of borrowing.

Let’s simplify things: You borrow $1,000 for a year at a cheaper rate of 9%, but with a $20 application fee. Is it better? A year later, you’d have paid back $90 in interest plus a $20 application fee. That’s $110, or 11% of the original. Not that good!

Now let’s complicate matters: You charge $1,000 on your credit card, which is interest-free for six months before increasing to 18%. It also costs $50 a year. So you’d have paid around $90 in interest plus a $50 fee over the last six months. You’ve returned 14% (1) of the principal, or $140.

The instances above illustrate that an APR is comparable across unsecured credit types, such as loans and credit card debt. However, in practice, APRs are more complicated due to debt repayment. 

The finer details

If you’re not interested in the technical details, feel free to skip the following two paragraphs!

Calculating interest is a complex process. For example, if you borrow $1,000 and pay 10% interest, you’ll only pay 10% if you pay it all back at the end of the year. In practice, you’ll pay a little each month, and the loan balance will reduce over time.

Because interest is only levied on what you owe, the interest payable on what you borrow will likewise reduce monthly. To account for this, plus the fact that your repayments should be constant (i.e., not fluctuate month to month), lenders must perform intricate computations.

An APR handles all the work for you, making comparisons between items easier.

What is an APR?

This one is simple. The lender calculates your personal APR when you apply for an unsecured loan or credit card (not all secured loans).

A representative APR is akin to an “average” APR that most consumers can expect.

It is a rate for which 51% of those approved are eligible. You may be among the 49% who would pay more, but you may reasonably anticipate paying this amount or close to it if accepted.

When you apply for a loan, you’ll get your specific APR, not the one advertised.

Why use a representative APR?

An APR allows borrowers to assess the exact cost of various borrowing options. That includes credit cards and loans.

It includes mandatory fees. SupaSmartLoans does not charge any fees, but review your agreement with your lender as they may impose a prepayment penalty (meaning you can always pay off your loan early).

APRs are beneficial for both loans and credit cards. However, there are several limitations to APRs that you should be aware of:

APRs on credit cards

A credit card can be substantially more or less expensive than promised. For example, paying down the bill in full each month avoids paying interest. On the other hand, if you merely make minimum payments, your interest rate will skyrocket.

To compute the APR on a credit card, lenders assume that you will have an outstanding debt of £1,200 from day one and pay it back in equal monthly installments over a year.

How to get the best personal loan APR?

It depends on your circumstances, as stated above. So, whether you need a debt consolidation loan, a credit card to pay for a big buy, or an overdraft to get you through a tough month, we’ll look at how you may lower your rate.

Improve your credit score

Your credit history is one of the primary elements lenders consider when establishing your personal rate. Borrowers with high credit are more likely to return their loans in full, making them less risky for lenders. So lenders can charge them reduced borrowing rates.

Building credit takes time, but there are fast remedies that can help you. 


You can potentially get a better APR by shopping around. Remember two things when doing so. A lender will first run a credit check whenever you apply for credit.

Hard credit checks leave a mark on your credit history, and too many (especially denials) in a short period might raise red flags for lenders. To avoid hurting your credit rating, you should avoid making too many applications when shopping around.

Remember that the APR displayed on a lender’s website or advertising material is a representative APR. That makes it a decent guide for the rate you’ll get, but keep in mind that rates can change.

Consider alternative credit

You can utilise APRs to compare various credit options, which is great. If you’re considering a personal loan, APRs can help you compare the cost of credit to a credit card, for example. This is a fantastic alternative if your requirements are flexible.

Frequently Asked Questions

What is a good APR?

The big one! The most competitive personal loans under 43,000 have an APR of roughly 8% or 9%. (4). However, APR is merely a reference to pricing; you should also evaluate the repayment structure.

Do fix and variable APRs differ?

A personal loan’s APR is usually fixed, meaning it won’t vary while you’re paying it back. With credit cards, the provider can reduce or increase rates over time. However, your credit card company must notify you and explain your options clearly.

What is the difference between a fixed-rate and an APR?

Since each borrower’s APR will be slightly different, lenders utilise a “representative APR” available to at least 51% of applicants as a benchmark.

Unlike a tracker mortgage, a fixed-rate mortgage is “locked-in” for a set length of time. Loans usually have fixed interest rates, whereas credit card rates might fluctuate.