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Interest rates and APR

When reading about car finance you’ve probably come across the terms ‘interest rate’ and ‘APR’. Have you ever found yourself wondering, what they are? And what’s the difference between them? If so, don’t worry, you’re not the only one. 

What is ‘interest’?

When talking about car finance, ‘Interest’ is the money you pay to a lender in return for them lending you money. There is also savings interest, which is what your bank or building society pays you, when you put money into a savings account.

What is an ‘interest rate’

An ‘interest rate’ is the rate at which interest is charged (or paid) to you. When you borrow money, the interest on it is normally a figure expressed as a % of the amount you have borrowed.  At Oodle, if a loan charges 5% interest, that means the interest you pay is equal to 5% of the amount you borrowed. 

How Oodle will calculate your interest

It's worth noting that not all lenders will calculate interest in the same way. The interest charged is in addition to the amount you borrowed so if you borrow £100 at 5% interest you will have to repay £105, which is the £100 you borrowed plus £5 of interest.

The interest % is charged for over a set period, usually one year (in which case it is called ‘annual interest), with the full % being charged for each of these periods. For example:

  • If you borrow £100 for one year at 5% annual interest, your annual interest rate will be 5% and you will pay £5 in interest.
  • If you borrowed £100 for two years at 5% annual interest, you would pay £5 each year - so £5 at the end of year 1 and another £5 at the end of year 2, giving a total of £10.

Oodle loans normally have annual interest, but other loans can calculate their interest on shorter periods, such as monthly, weekly or daily. For example, many Pay Day loans charge daily interest.


Can interest rates change?

Interest rates do change over time. The interest a lender charges needs to cover all their costs, including their admin and business costs, the cost of loans that do not get repaid and what it costs the lender to borrow money themselves (most lenders borrow at least some of the money they lend on to customers).  As those costs are constantly changing, the interest lenders need to charge also change.

There are two different types of interest to be aware of:

  • Fixed interest - this is a rate of interest that doesn't change for a period of time. An example is that you could have a fixed interest rate for the first year of your loan, or you might have a fixed rate of interest for the full loan term. Fixed rates can sometimes be higher than variable interest rates.
  • Variable interest - this is a rate of interest that may fluctuate throughout the term of your loan. It is influenced by the benchmark interest rate set by the Bank of England, so may increase or decrease on this basis - so you could either be paying more or less than you would with a fixed rate of interest.

What is APR?

APR (which stands for ‘Annual percentage rate’) is a figure that can be used to help you compare the total cost of different loans. 

People often use APR and and interest rates interchangeably, but they are different. APR is designed to tell you about the total cost of your borrowing over a year”, so it includes fees, charges etc, and it is not just the interest rate. 

It is also important to keep in mind that APRs average the total cost of a loan over its life. So, for example, while you might pay a document fee in full upfront, APR will be calculated as if payments for that fee are spread over the whole life of the loan.

How APRs are calculated

The APRs calculation look at all the costs for a loan, then spread those charges over the full life of the loan, to give an average cost per year. That average cost is then compared to amount borrowed, to give a % rate.

The APR calculation can be very complex but as all APRs must be calculated in the same way, all you need to do, in order to compare the costs of different loans, is compare their APRs. It's worth noting that APR is not the only factor that you should consider before entering into a car finance agreement.

What is Representative APR

Quite often a loan might include a ‘Representative APR’ which might seem like a different rate.

A Representative APR is still an APR and so still tells you about the total cost of the loan.  What makes an APR ‘Representative’ is that where a loan might have more than one interest rate (for example it might have a lower rate for people with a very good credit score) the lender must show the APR that it expects 51% or more of the people applying for the loan might get. 

Showing a Representative APR stops lenders from manipulating their main APR figure by only showing the very best rate offered. Although it is important to keep in mind that the APR on your loan is not guaranteed to be the Representative APR, it does provide a good general indication of a loan’s cost.

What is a good APR?

With so many factors to consider when it comes to setting an interest rate, even the same person will be offered different rates for different types of loan (a credit card usually has a very different APR from a mortgage, for example).  As a result, there is no single figure for a ‘good’ APR and what is a ‘good’ APR for one person might not be a ‘good’ APR for another.

When looking for car finance, or any other kind of finance, the best approach is start by working out how much you want, and are able, to pay each month and then looking to see what finance you might get to fit in with your budget. 

Interest rate and APR FAQs

  • Can the interest rate on my loan go up?

    It depends on the type of loan you have.


    Some loans do have an interest rate that change over time which is known as ‘variable rate’.  Other types of loans, including those normally offered by Oodle, are what is called ‘fixed rate’ loans.  With a fixed rate loan, the interest rate is set at a fixed % when you take out the loan and so will not normally change after that.


    The advantage of a fixed rate loan is that you always know what you must pay, making it easy to budget for. Although your fixed rate will not go down when other rates fall, it will also not go up, when other rates rise.

  • What interest rate will I get?

    Although your credit score is very important in deciding what interest rate you will get, there are also lots of other things that go into the decision (such as the type of loan, how much you are borrowing and how long you are borrowing for) so it is very difficult to say in advance what rate you might get.

    On top of that, each lender has its own view on the relative importance of the factors that go into its lending decisions.  They may even attach different levels of importance to the same piece of information, which is why if you go to three different lenders you may well be offered 3 different rates.   

  • What is the difference between Interest rates and APR?

    Hopefully, you can now see that interest rates and APRs are two different things. The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage. The APR considers the total cost of the borrowing, so it includes fees and charges as well