What is APR?
APR stands for annual percentage rate. It shows the yearly cost of borrowing money as a percentage, counting the interest rate plus certain fees the lender charges, so offers can be compared on one measure.
Action level Worth checking
- Why you are seeing it
- It is shown on loan offers and other borrowing documents.
- Why it matters
- It shows the yearly cost of borrowing as one percentage, counting the interest rate plus certain fees, so offers can be compared on one measure.
- What should I do?
- Compare APRs only for the same type of loan and the same term.
- Look at the amount, the term and how long you expect to keep the loan, because a lower APR does not always mean a lower total cost.
- A common misunderstanding
- APR is not the same as the interest rate: when a loan has up-front charges, its APR is higher than its interest rate.
- Other meanings
- APR is used for borrowing. For money you earn on savings, the figure to look for is APY.
See it with your numbers
An example loan with an up-front charge. Change any number.
The interest rate is 6.50%, but the APR is about 7.35%.
- Interest rate
- 6.50%
- APR (estimate)
- 7.35%
- Monthly payment
- $489.15
- Money you actually receive
- $24,500.00
- Total paid back
- $29,349.22
- Same payment, less money received: that is why the up-front charge raises the APR.
- An estimate for learning: a real APR uses the lender's exact dates, charges and rounding. This is not an offer or a quote.
An estimate for learning, under the assumptions shown. Not financial advice, a quote or an offer.
How APR works
A lender quotes an interest rate, which is the price of the borrowed money itself. APR starts from that rate and also counts certain up-front charges, spreading them over the life of the loan. When a loan has those charges, its APR is higher than its interest rate.
In the United States, lenders must show the APR on most consumer loans under the Truth in Lending Act, and the calculation method is set out in Regulation Z. Which charges count depends on the kind of loan, so APRs are only comparable between loans of the same kind.
A simple example
A $25,000 loan at 6.5% for 60 months, with $500 in up-front charges
Monthly payment: $489.15.
You receive $24,500 after the charge, but you repay about $29,349 over 60 months.
Because you pay back that much while receiving less, the APR works out to about 7.35%, higher than the 6.5% rate.
APR and interest rate: the difference
| Interest rate | APR | |
|---|---|---|
| What it measures | The cost of the borrowed money alone | The yearly cost of the money plus certain charges |
| Best used for | Working out the interest you pay | Comparing offers for the same kind of loan |
| Fees included | No | Certain ones |
What to keep in mind
- Compare APRs for the same type of loan and the same term. A short loan and a long loan are not comparable by APR alone.
- A lower APR does not always mean a lower total cost: the amount, the term and how long you keep the loan also matter.
- APR assumes you keep the loan to the end. If you pay it off early, the up-front charges are spread over less time.
- On a credit card, the APR describes the interest charged on balances you carry, and it can change.
Try these tools
- Car Loan ComparisonCompare two car loan offers side by side, including rebate versus low APR.
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- Credit Card Payoff ComparisonCompare the estimated cost of a balance transfer with your current card.