APR and interest, explained simply

Interest in one sentence

When you borrow, you pay back what you borrowed plus extra. That extra is interest. When you save, the bank pays you interest.

Example (made-up numbers): borrow £1,000 for a year at 10% interest a year, paying it back at the end, and you pay back about £1,100.

Interest rate vs APR

Interest rate

The percentage charged on the money you borrow.

APR (annual percentage rate)

The yearly cost of borrowing, including interest and most required fees, shown as one percentage. It lets you compare loans and cards on a like-for-like basis. A lower APR usually means cheaper borrowing.

Representative APR (UK)

The rate at least 51% of accepted customers get. You might be offered a higher rate, so check the rate in your offer before you agree.

Compound interest

Interest charged on interest. If interest is added to what you owe, the next month's interest is worked out on the bigger amount. This is why debts can grow quickly when they aren't being paid down.

Credit cards

• Minimum payment: the least you must pay each month. Paying only the minimum keeps the account in good standing, but it can take years to clear the balance and cost far more in interest.
• 0% offers: no interest for a set period on purchases or balance transfers. Check when it ends, the rate afterwards, and any balance-transfer fee.
• Cash withdrawals on a credit card often cost a fee and a higher rate, with interest from day one.

Overdrafts and short-term loans

An arranged overdraft is borrowing from your bank account. Its interest rate can be high, so check your bank's rate. Short-term and “payday” loans can be very expensive: look at the total amount you will repay, not only the monthly payment.