APR

Definition

APR, or annual percentage rate, is a standardised figure that expresses the yearly cost of credit as a percentage of the amount borrowed. It folds together the interest charged and certain compulsory fees, so two facilities can be compared on a like-for-like basis. APR is a costing convention designed for comparison — it is not the same as the interest rate alone.

In plain terms

An interest rate tells you what the lender charges on the balance. APR tries to tell you the all-in annual cost once mandatory fees are baked in. Because it annualises everything, APR can look high on short-term finance even when the actual pounds-and-pence cost is modest — borrowing £20,000 for six weeks may carry a large APR but a small total charge. For short business facilities, always look at the total amount repayable alongside the APR.

Why it matters to your business

APR is your comparison tool. When you place two offers side by side, a lower APR generally signals cheaper borrowing for a like-for-like term. But it is only half the picture for short-term working capital: a high APR over a few weeks can still mean a small absolute cost. Read the APR, then read the total repayable and any fees that sit outside the APR calculation, such as optional add-ons. That combination tells you what the facility truly costs.

APR versus flat rate

A flat rate charges interest on the original amount borrowed for the whole term, ignoring the fact that you are repaying as you go. That makes a flat rate look lower than it really is. APR, by contrast, accounts for the reducing balance, so a 6% flat rate can equate to an APR closer to 11–12% — figures here are illustrative of the market, not a quoted Credicorp rate. When comparing offers, make sure you are comparing APR to APR, never APR to flat.