The Annual Percentage Rate (APR) is used to compare the true yearly cost of borrowing money. It includes not only the interest charged, but also any compulsory fees. APR is most commonly used when comparing loans, credit cards and mortgages.

The key purpose of APR is to allow fair comparisons between financial products that may have different interest rates, fees or repayment structures. A lower APR usually means a cheaper deal overall, but the context must always be considered.

For simple loans with no additional fees, the APR is often close to the stated interest rate. When fees are added, the APR increases because the total amount repaid is higher.

For example, suppose £1,000 is borrowed and £1,120 is repaid after one year. The interest and charges total £120. The APR can be calculated as:

$$
\frac{120}{1000}
$$

$$
= 0.12
$$

This corresponds to an APR of \( 12\% \).

APR is especially important for mortgages, which are long term loans usually repaid monthly over many years. Mortgage deals often include arrangement fees, booking fees or cashback offers. APR takes all of these into account and spreads the cost over the full term of the mortgage.

Because mortgages are repaid over a long period, even a small difference in APR can lead to a large difference in the total amount repaid.

When comparing two mortgages, the one with the lower APR is usually cheaper over the full term, even if its headline interest rate appears higher. However, short term deals may still need careful comparison if the mortgage will be switched after a fixed period.

APR is a useful tool, but it assumes the loan is kept for the full term and repaid exactly as planned. Always consider how long the product will be used and whether fees apply when making financial decisions.

Using APR allows borrowers to compare financial products more accurately and make informed choices about loans and mortgages.

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