What is important to know about the APR?

It is required by law for personal financing institutions to quote the effective rate of interest or Annual Percentage Rate (APR). In the attempt to calculate the total cost of borrowing money, the APR usually includes not only the interest charged but also other fees. For instance if you borrow ₤1000 at 5 per cent  simple interest (which means at the end of the year you would owe ₤105), and you pay the lender a ₤50 initiation fee, your total cost to borrow the money would be ₤100 and an APR close to 10 per cent.
Off course the calculation is often more complicated and involves as many details as the lending institution considers adequate. With the 1980 Total Charge for Credit Regulations, the government tried to standardize the way in which financing institutions calculate the APR. The basic formula determined how much annually a borrower would pay for the use of the money, taking into account the total charges and the term of the loan. In 2004 a reform to this formula was proposed and it is still being revised. In the meantime, financial institutions continue disclosing APRs that appear lower because they omit other costs like legal fees. 
The idea behind the APR is to make it easier for you to compare loan conditions. Lenders are required to disclose the APR in the pre-contractual information. When evaluating the available loan options be aware that the APR does not represent in reality the total cost of borrowing. Some fees and penalties are deliberately not included in the calculation and the actual rate depends on the duration of the loan. Nevertheless, use the APR to compare across the different options and always ask the lender which costs are not covered by the given rate.