APR

Annual Percentage Rate (APR)

APR stands for Annual Percentage Rate. It represents the yearly cost of borrowing money, expressed as a percentage. Unlike a basic interest rate, APR typically includes not just the interest you pay but also certain fees and other costs associated with the loan, giving you a more complete picture of what you will actually pay each year.

Lenders are generally required by law to disclose the APR on credit products, including credit cards, mortgages, and personal loans. This requirement exists so that consumers can compare offers from different lenders on a fair, consistent basis. A loan with a low interest rate but high fees may, in most cases, carry a higher APR than a loan with a slightly higher interest rate but fewer fees.

Why it matters

APR is one of the most useful numbers to look at when shopping for a loan or credit card. Because it combines interest and fees into a single figure, it allows you to make a more apples-to-apples comparison between competing offers. Focusing only on the interest rate can sometimes be misleading if one lender charges significant origination fees or other costs.

Keep in mind that for credit cards, the APR is typically most relevant if you carry a balance from month to month. If you pay your full statement balance each billing cycle, you generally will not be charged interest at all, regardless of the stated APR.

Example

Suppose you are comparing two personal loans, each for $10,000 over three years. Lender A offers an interest rate of 7% but charges a $300 origination fee. Lender B offers an interest rate of 8% with no origination fee. After factoring in that fee, Lender A’s APR comes out to approximately 9.1%, which is higher than Lender B’s APR of 8%. In this scenario, Lender B is generally the less expensive option, even though its stated interest rate is higher.

Related terms

• Interest rate: the basic percentage charged on a borrowed amount, not including fees
• APY (Annual Percentage Yield): the rate of return on a deposit account, factoring in compounding interest
• Origination fee: an upfront charge by a lender for processing a new loan
• Prime rate: a benchmark interest rate that lenders often use to set their own loan rates
• Fixed vs. variable rate: describes whether a loan’s interest rate stays the same or can change over time