APR and interest rate are two terms you’ll see on almost every loan or finance agreement. They’re often shown side by side, and it’s easy to assume they mean the same thing. They don’t.

The main difference between APR and interest rate is what they include. The interest rate is the cost of borrowing the money itself. The APR (Annual Percentage Rate) includes the interest rate plus any fees or charges, giving you a fuller picture of the total annual cost.

Both matter when comparing finance options, but they tell you different things. We’ll explain what each one means, how they differ, and which to focus on when you’re weighing up your choices.

What is an interest rate?

An interest rate is the percentage a lender charges you for borrowing money. It’s applied to the loan amount and determines how much you’ll pay on top of what you originally borrowed.

For example, if your business borrows £20,000 at an 8% interest rate over two years, the interest alone would cost you around £1,720. The higher the rate, the more you’ll pay overall.

Interest rates are influenced by a few things: the Bank of England base rate, the lender’s own pricing, and your credit profile. A stronger credit history typically means a lower rate, because the lender sees less risk. The type of finance also plays a part. Secured loans usually come with lower rates than unsecured options because the lender has an asset as security.

The interest rate tells you the basic cost of borrowing, but it doesn’t include arrangement fees or other charges. That’s what separates it from APR.

What is APR?

APR (Annual Percentage Rate) is the total cost of borrowing over a year, shown as a percentage. It includes the interest rate plus any additional fees or charges, such as arrangement fees, admin costs, or broker fees.

For example, say your business borrows £20,000 at a 7% interest rate over two years, with a £500 arrangement fee. The interest rate stays at 7%, but the APR would be around 8.2% because it factors in that fee. When you’re comparing lenders, APR gives you a clearer view of the total cost rather than the headline rate alone.

In the UK, lenders are required to show a representative APR when advertising finance. However, they only have to offer that rate to at least 51% of applicants. The rate you’re offered may be higher depending on your circumstances.

Because APR includes fees that the interest rate doesn’t, it’s almost always the higher number. If a lender’s APR and interest rate are the same, it usually means there are no additional fees involved.

Differences between APR and interest rate

Both terms describe the cost of borrowing, but they measure different things.

1. What they include

The interest rate is the cost of borrowing the money itself. APR includes the interest rate plus any fees or charges, giving you the total annual cost.

2. Which is usually higher

APR is almost always the higher number because it includes additional costs. If the two figures are the same, it usually means there are no extra fees on the loan.

3. What affects your monthly payments

Your monthly payment is based on the interest rate, not the APR. A lower interest rate means lower repayments, even if the APR is higher due to upfront fees.

4. Which to use when comparing loans

APR is the better figure for comparing finance from different lenders. It shows the total annual cost, so you’re not caught out by a low interest rate with high fees attached.

When should you focus on the interest rate?

Focus on the interest rate when you want to understand your monthly payments. Your repayments are calculated from the interest rate, so it’s the figure that determines what leaves your account each month.

For example, if your business is taking out finance and needs to keep monthly costs within a set budget, the interest rate will tell you whether the loan is affordable on a day-to-day basis.

The interest rate also matters if you’re planning to repay early. A lower rate means less interest builds up while you hold the debt, which can reduce the total amount you pay if you clear the balance ahead of schedule.

When should you focus on APR?

Focus on APR when you’re comparing finance options from different lenders. Because APR includes fees as well as interest, it gives you a more accurate picture of the total cost over a year.

For example, one lender might offer a 6% interest rate with a £600 arrangement fee, while another offers 7% with no fee. The interest rate alone makes the first option look cheaper, but the APR would show you which deal actually costs less overall.

APR is particularly useful if you plan to hold the loan for its full term. The longer you’re borrowing, the more those upfront fees affect the total amount you repay.

Which should you focus on: APR or interest rate?

It depends on what you’re trying to work out. If you want to know whether the monthly repayments fit your budget, look at the interest rate. If you’re comparing quotes and want to see which deal costs less overall, APR is more useful.

Both figures tell you something valuable, and the right one to focus on depends on your situation. If you’re new to business finance, our guide on how business loans work covers the basics. And if you’re ready to explore your options, you can apply online in a few minutes without affecting your credit score.