What Is APR?

What Is APR?

APR stands for Annual Percentage Rate -- the yearly cost of borrowing money expressed as a single percentage that includes not just the interest rate but also certain lender fees and costs. APR is required by the Truth in Lending Act (TILA) to be disclosed on all consumer loans, making it the standard comparison metric for loan products in the United States.

APR vs. Interest Rate

The interest rate is the cost of borrowing the principal balance. APR is broader: it includes the interest rate plus lender origination fees, mortgage broker fees, discount points, and other costs. On a mortgage, APR is almost always higher than the stated interest rate. For example, a 6.75% rate with $4,000 in fees on a $350,000 loan might carry a roughly 6.86% APR. On a personal loan with no fees, APR and interest rate may be identical.

How to Use APR When Comparing Loans

When comparing loan offers from multiple lenders, always compare APRs rather than interest rates. A lender offering a lower interest rate but charging higher origination fees may have a higher APR -- meaning you pay more in total. The Loan Estimate (for mortgages) and the Truth in Lending disclosure (for other consumer loans) both display the APR prominently.

APR on Credit Cards

Credit card APR is a simple annualized rate, not an amortization-based calculation. Daily interest is calculated by dividing APR by 365 and multiplying by the daily balance. If you pay your full statement balance each month, you pay no interest regardless of the APR.

Common APR Mistakes

Comparing APR across different loan terms. The same fees spread over a shorter or longer term produce different APRs -- only compare loans with the same term and amount.

Using APR alone for a loan you'll pay off early. APR assumes the full term. If you'll sell or refinance within a few years, a lower-APR loan with points can cost more than a no-points loan with a slightly higher APR.