You’ve probably seen APR mentioned when looking at credit cards or loans – but what does it actually mean? Let’s break it down in simple terms so you can understand how it affects borrowing costs.
What is APR?
APR stands for Annual Percentage Rate. It’s the yearly cost of borrowing money, shown as a percentage. APR includes both the interest rate and any fees, giving you a clear picture of how much a loan or credit will cost over a year.
Why does APR matter?
Understanding APR helps you compare financial products like loans and credit cards. A lower APR means borrowing costs you less, while a higher APR could lead to paying more over time.
How is APR calculated?
Three main factors determine APR:
- Principal amount – the money you borrow or your credit card balance
- Interest rate – what the lender charges as a percentage of the principal
- Time period – how long you’re borrowing for
Simple vs compound interest
- Simple interest is calculated only on the original amount borrowed.
- Example: Borrow £1000 at 5% APR for one year. You’d pay £50 in interest.
- Compound interest adds interest to the balance over time, meaning you pay interest on interest. This can make borrowing more expensive in the long run.
Fixed vs variable APR
- Fixed APR stays the same for the entire loan term, so your payments won’t change.
- Variable APR can go up or down based on market conditions, which could lower costs or make borrowing more expensive.
What’s the Zilch APR?
Spend responsibly, spending more than you can afford could seriously affect your financial status. Credit subject to status, 18+, UK residents only. T&Cs apply.
Zilch offers flexible ways to pay with varying APRs depending on your plan:
Up to £2250 credit limit, 18.6% APR Representative. Pay over 6 weeks or 3 months with no interest – fees may apply.
Up to £2250 credit limit, 14.99% APR Representative. Similar to Classic but with extra benefits. Pay over 6 weeks or 3 months with no interest – fees may apply.
Up to £600 credit limit, 25.2% APR Representative. Designed for credit building. Pay over 6 weeks with no interest – fees may apply.
How to reduce interest charges
- Pay on time – avoid penalty APRs
- Pay more than the minimum – clear your balance faster, so you pay less interest
- Transfer high-interest debt – moving it to a lower-APR card could save money, but watch for fees
TL;DR – here’s the gist
APR helps you understand the true cost of borrowing. The lower the APR, the less you pay – but always check the full details, including fees and repayment terms. Knowing how it works puts you in control of your finances.