The interest rate is what the lender charges. The APR is what the loan costs. They are rarely the same number, and the gap is the point.
What each number contains
The interest rate answers one question: what does the lender charge for the money? It drives your monthly payment and nothing else.
The APR answers a broader one: what does this loan cost in total, expressed as an annual percentage? It takes the fees you must pay to get the loan, spreads them across the term, and re-expresses the whole thing as a rate.
| Cost | In the interest rate? | In the APR? |
|---|---|---|
| Interest on the principal | Yes | Yes |
| Origination fee | No | Yes |
| Discount points | No | Yes |
| Broker fee | No | Yes |
| Mortgage insurance | No | Usually |
| Appraisal, survey, title | No | Varies by jurisdiction |
| Late fees, early repayment | No | No |
That last row matters. APR assumes you pay exactly to schedule for the full term. It says nothing about what happens if you overpay, underpay or refinance.
Why the gap tells you something
A loan with a 6.0% rate and a 6.1% APR carries almost no fees. A loan with a 5.5% rate and a 6.4% APR is loaded with them — and despite advertising a lower rate, it is the more expensive loan.
That second structure is common and legal. Points are sold as a way to "buy down" the rate: pay a fee upfront, get a lower rate. Whether that is worth it depends entirely on how long you keep the loan.
A rough rule: divide the upfront cost by the monthly saving to get the break-even in months. Pay £3,000 in points to save £60 a month and you break even at 50 months. Keep the mortgage longer than that and you win; refinance or move at year three and you paid £3,000 for nothing.
Where APR stops being comparable
APR is designed for like-for-like comparison and there are cases where it quietly fails at that.
- Different terms. A 15-year and a 30-year mortgage cannot be compared on APR alone. The shorter loan usually has a higher payment and a far lower total cost.
- Adjustable rates. APR on an ARM assumes the current index holds for the whole term, which nobody believes. It is a projection presented as a fact.
- Early repayment. APR spreads upfront fees over the full term. Repay in year four of a twenty-five year loan and your effective cost is much higher than the stated APR.
- Credit cards. Card APR excludes annual fees in most jurisdictions and assumes you carry a balance. If you clear the balance monthly, the APR is irrelevant and the fee is the only cost.
Where terms differ, compare total cost over the period you actually expect to hold the loan. The Loan Calculator shows total interest alongside the monthly figure, which is the comparison APR is trying and failing to make for you.
The number nobody advertises
Neither rate nor APR is the figure that should decide anything. Total cost is.
On a £250,000 mortgage at 6% over 25 years you pay about £233,000 in interest — you buy the house nearly twice. Move to 5.5% and it is roughly £210,000. That half a percentage point is £23,000, which is not what "half a percent" sounds like.
This is why the rate looks small and the consequence is not. Interest compounds against a balance that falls slowly at first, so early years are almost all interest. Run any offer through a calculator and look at total interest before signing anything.
Reading an offer quickly
Four checks that catch most problems.
- Compare APR to APR, never rate to APR. Lenders quote whichever flatters them.
- Find the gap. Rate to APR of more than about 0.3 points means meaningful fees. Ask for the itemised list.
- Check the term matches before comparing anything at all.
- Look at total interest, not the monthly payment. A longer term always lowers the monthly figure and always raises the total.
If a lender will not give you an APR, that is itself the answer. In the US it is required by the Truth in Lending Act; in the UK and EU the equivalent APRC disclosure is mandatory for regulated credit.
Frequently asked questions
Is APR always higher than the interest rate?
Equal or higher, never lower. APR is the interest rate plus the mandatory fees spread across the term. If a lender quotes an APR below the rate, something is being calculated unconventionally and is worth questioning.
Which should I compare loans on?
APR, provided the terms are identical. It is designed exactly for that. Where terms differ — a 15-year against a 30-year — APR cannot help, and you should compare total cost over the period you realistically expect to hold the loan.
Are discount points worth paying?
It depends how long you keep the loan. Divide the upfront cost by the monthly saving for the break-even in months. Pay £3,000 to save £60 a month and you break even at 50 months — worthwhile if you stay longer, wasted if you refinance at year three.
Does APR apply to credit cards the same way?
No. Card APR generally excludes the annual fee and assumes you carry a balance. If you clear it in full each month you pay no interest at all, so the APR is irrelevant and the annual fee is the only real cost.
Why is my monthly payment mostly interest at the start?
Because interest is charged on the outstanding balance, which is at its highest on day one. Early payments are therefore almost all interest with very little going to principal. That flips gradually — the crossover on a 25-year mortgage is usually somewhere past the halfway point.
Can APR be misleading?
Yes, in specific ways. It assumes you hold the loan for the full term, so early repayment makes your real cost higher than stated. On adjustable rates it projects today's index across the whole term, which is a guess presented as a number.