Glossary · Definition
APR
APR (Annual Percentage Rate) is the total yearly cost of borrowing money, expressed as a percentage — including the interest rate plus most fees. It's the number you should compare between loans, not the 'interest rate'.
Definition
APR (Annual Percentage Rate) is the total yearly cost of borrowing money, expressed as a percentage — including the interest rate plus most fees. It's the number you should compare between loans, not the 'interest rate'.
What it means
The Annual Percentage Rate standardizes how lenders disclose borrowing costs, so that borrowers can compare offers on an apples-to-apples basis. The US Truth in Lending Act requires lenders to show APR on every consumer loan — mortgage, auto, credit card, personal — exactly because raw interest rates don't include fees, points, and other charges that make a loan cost more. For a mortgage, APR includes the base rate plus origination fees, discount points, and most closing costs spread across the life of the loan. For a credit card, APR is essentially the interest rate itself (card APRs rarely have 'fees' in the APR sense, with cash-advance APR being the exception).
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Why it matters
Two loans with the same interest rate can have very different APRs — a loan with $4,000 in origination fees will carry a meaningfully higher APR than a fee-free loan at the same headline rate. When you're comparing mortgages, auto loans, or personal loans, the APR is the fair comparison. The one catch: APR assumes you hold the loan to term. If you plan to refinance in 5 years, the upfront-fee loan might have a higher APR but be the cheaper real choice, since fewer years of the loan actually happen.
Example
A $200,000, 30-year mortgage at a 6.5% interest rate with $4,000 in closing costs has an APR of about 6.68%. A competing mortgage at 6.6% interest with $800 closing costs might have an APR of 6.63% — a lower true cost despite the higher headline rate.
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Frequently asked questions
What's the difference between APR and interest rate?
Interest rate is just the cost of the money; APR adds in fees and is therefore a more complete picture of the loan's cost.
What's the difference between APR and APY?
APR ignores compounding; APY includes it. For borrowing, APR is the standard; for savings accounts, APY is — because compounding increases your return.
Is a lower APR always better?
Usually, but not always — a loan with higher APR but lower upfront fees can be the better choice if you plan to pay it off or refinance early.
Related terms
- DefinitionAPYAPY (Annual Percentage Yield) is the total yearly return on a savings account, CD, or investment — expressed as a percentage and including the effect of compounding. When comparing savings products, APY is the fair number.
- DefinitionCompound interestCompound interest is interest earned on both your original money AND the interest it's already earned. Over long periods, this 'interest on interest' effect is what turns modest monthly contributions into retirement-level balances.
- DefinitionAmortizationAmortization is the process of paying off a loan with equal periodic payments that are split between interest and principal. In the early months, most of your payment goes to interest; as the balance shrinks, more goes to principal.