The interest rate is the yearly price of borrowing the money. The APR (annual percentage rate) is a broader yardstick: it takes the interest rate and adds in certain loan fees, then expresses the total yearly cost as a single percentage. That makes APR the better number for comparing loan offers side by side.
A simple example
Say you borrow $10,000 for 5 years at an 8% interest rate. The monthly payment is $202.76. Now suppose the lender charges a $300 origination fee and subtracts it from the money you receive, so you actually get $9,700 but still repay the full $10,000 on the same schedule. Your payment has not changed, but you are paying the same amount for less money. Solving for the rate that fits those numbers gives an APR of about 9.30% instead of 8%.
| Loan A | Loan B | |
|---|---|---|
| Interest rate | 8.00% | 8.00% |
| Origination fee | $0 | $300 |
| Cash you receive | $10,000 | $9,700 |
| Monthly payment | $202.76 | $202.76 |
| APR | 8.00% | about 9.30% |
Both loans advertise 8%, but Loan B is the more expensive one. The APR reveals that.
What APR includes and does not include
- Usually included: interest, and certain fees the lender charges as a condition of the loan, such as origination fees.
- Usually not included: late fees, penalties you might trigger, and costs paid to third parties that are not a condition of the loan. Ask the lender for a full list of fees.
- Credit cards: the card APR is the yearly rate applied to unpaid balances. Pay your statement balance in full each month and you generally pay no interest on purchases.
APR versus APY
APR is typically used for borrowing. APY (annual percentage yield) is typically used for savings and includes the effect of compounding. When you borrow, you want a low APR. When you save, you want a high APY. See the glossary for more.
How to use APR when shopping
- Get offers with the same loan amount and term.
- Compare APRs first, then look at fees and monthly payment.
- Check whether the rate is fixed or variable.
- Run the numbers in the Loan Calculator to see total interest for each term.
Compare loan offers with the Loan Calculator
Common questions
What does APR stand for?
Annual percentage rate. It expresses the yearly cost of a loan, including certain fees, as a percentage.
Is a lower APR always better?
Usually, when the loan amount and term are the same. A lower APR means a lower yearly cost, but also compare the total interest and any fees that APR does not capture.
Is APR the same as the interest rate?
No. The interest rate is only the cost of borrowing the principal. APR adds certain fees, so it is usually higher.
What is a good APR?
It depends on the type of loan, the market and your credit profile. Compare offers from several lenders instead of aiming for one number.