Quick Definition

APR (Annual Percentage Rate) is the yearly cost of borrowing money expressed as a percentage, including both the interest rate and any fees charged by the lender.

How APR Works

While a loan's interest rate tells you the base cost of borrowing, the APR gives a more complete picture by rolling in origination fees, closing costs, and other lender charges. This makes APR the better metric for comparing loan offers from different lenders — a lower interest rate with high fees can actually cost more than a higher rate with no fees.

Federal law (the Truth in Lending Act) requires lenders to disclose the APR on all consumer loans, making it easier for borrowers to compare apples to apples.

APR vs. APY vs. Interest Rate

  • Interest Rate: The base percentage charged on a loan, without fees
  • APR: Interest rate plus fees, expressed annually — used for borrowing
  • APY: The effective annual return including compounding — used for saving

APR does not account for compounding, while APY does. For savings accounts, APY is always equal to or higher than the stated interest rate because it includes the effect of compound interest.

Real-World Example

Example

Lender A offers 6.0% interest with $3,000 in fees (APR: 6.25%). Lender B offers 6.25% interest with no fees (APR: 6.25%). Despite different interest rates, the total cost is identical. Compare the APR, not just the rate.

Frequently Asked Questions

Is a lower APR always better?

Generally yes, but context matters. A low APR with a longer loan term can result in more total interest paid than a higher APR with a shorter term. Compare both the APR and total cost of the loan.

Why is my credit card APR so high?

Credit cards are unsecured debt with no collateral, so lenders charge higher rates to offset risk. Average credit card APRs range from 20-30%, much higher than secured loans like mortgages (6-8%).

Does APR include all loan costs?

APR includes most lender fees like origination charges and discount points, but it may not include third-party costs like title insurance, appraisals, or home inspections on mortgages.