Credicorp
APR vs daily interest rate UK: which is the honest comparison for short-term loans?
If you have ever seen an eye-watering APR on a short-term loan and wondered whether it could really be that expensive, you have run into a genuine quirk of how APR works. APR is a useful tool for some products and a misleading one for others. Here is the difference between daily interest and APR, why APR overstates the cost of very short-term borrowing, and what we show instead.
APR — the Annual Percentage Rate — is designed to let you compare the cost of credit on a single, standardised, yearly basis. It rolls interest and certain charges into one annualised figure. For products you hold for a year or more — a mortgage, a multi-year loan, a credit card balance carried over time — APR does its job well, because the product genuinely lasts around a year or longer.
The problem appears when you take a figure designed for a year and apply it to something that lasts a few weeks. APR annualises the cost — it projects what the borrowing would cost if it ran, and compounded, for a whole year. But a short-term bridging loan does not run for a year. It runs for days or weeks and is then repaid.
Consider the shape of it without quoting any rate: a modest amount of interest charged over, say, a few weeks is a small cash sum. Annualise that short period — compound it as if it repeated all year — and the percentage looks enormous, even though the actual pounds you pay are limited and known in advance. The high APR is an artefact of the maths, not a reflection of what leaves your bank account. For a product measured in weeks, an annual percentage is simply the wrong unit. We unpack the concept further in what APR means on your loan.
Because our Business Bridging Loan is short-term — £50 to £500 over 14 to 84 days — we do not quote a consumer APR, which would distort rather than clarify. Instead we show you the figures that actually tell you what the borrowing costs:
All of this appears on your Key Information Sheet (KIS) and again in the Business Loan Agreement, alongside the full repayment schedule, before you sign anything. The most honest comparison for short-term borrowing is the total cash cost: look at the total amount payable and the total cost of credit, and you know exactly what you are paying.
What APR is meant to do
APR — the Annual Percentage Rate — is designed to let you compare the cost of credit on a single, standardised, yearly basis. It rolls interest and certain charges into one annualised figure. For products you hold for a year or more — a mortgage, a multi-year loan, a credit card balance carried over time — APR does its job well, because the product genuinely lasts around a year or longer.
Why APR overstates very short-term borrowing
The problem appears when you take a figure designed for a year and apply it to something that lasts a few weeks. APR annualises the cost — it projects what the borrowing would cost if it ran, and compounded, for a whole year. But a short-term bridging loan does not run for a year. It runs for days or weeks and is then repaid.
Consider the shape of it without quoting any rate: a modest amount of interest charged over, say, a few weeks is a small cash sum. Annualise that short period — compound it as if it repeated all year — and the percentage looks enormous, even though the actual pounds you pay are limited and known in advance. The high APR is an artefact of the maths, not a reflection of what leaves your bank account. For a product measured in weeks, an annual percentage is simply the wrong unit. We unpack the concept further in what APR means on your loan.
What we show instead
Because our Business Bridging Loan is short-term — £50 to £500 over 14 to 84 days — we do not quote a consumer APR, which would distort rather than clarify. Instead we show you the figures that actually tell you what the borrowing costs:
All of this appears on your Key Information Sheet (KIS) and again in the Business Loan Agreement, alongside the full repayment schedule, before you sign anything. The most honest comparison for short-term borrowing is the total cash cost: look at the total amount payable and the total cost of credit, and you know exactly what you are paying.
- the amount borrowed;
- the term (how many days, and how many repayments);
- the total amount payable — every pound you will repay in total;
- the total cost of credit — the difference between what you borrow and what you repay; and
- a simple annualised rate, for a like-for-like reference point, shown without the compounding distortion of APR.
This does not make the loan cheap
Showing the cost honestly is not the same as the cost being low. Short-term unsecured borrowing is expensive relative to a bank facility, and we will not dress that up. The point of showing total cost of credit rather than a distorted APR is so you can see the real number and make a clear-eyed decision — not so the loan looks cheaper than it is. To see how the figures are built up, read our worked example in how interest is calculated.
How to compare honestly
When you compare short-term options, compare the total cost in pounds over the actual period you will borrow, not the headline annual percentages. APR is the right tool for a year-long product and a misleading one for a two-week one. Ask any lender for the total amount payable and the total cost of credit for your exact amount and term — that is the figure that tells you the truth, and it is the figure we put in front of you before you commit.
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