What APR is
The Annual Percentage Rate (APR) is a standardized way to express the true yearly cost of a loan or credit product. It combines the interest rate with most required fees, then states the total as a single percentage. Because it folds in those costs, APR usually gives a fairer comparison between loans than the headline interest rate alone.
How it differs from the interest rate
The nominal interest rate covers only the cost of borrowing the principal. APR goes further:
- It adds many mandatory charges, such as origination fees or certain closing costs.
- It is expressed on an annual basis even for shorter loans.
- It does not normally account for compounding within the year, which is what the related APY measures.
For example, a mortgage with a 6 percent interest rate might carry a 6.3 percent APR once fees are included.
Why it matters
Lenders in many countries are required to disclose APR so borrowers can compare offers on equal footing. A loan with a low interest rate but high fees may have a higher APR than a competing offer, revealing the better deal. APR is most useful when comparing products of the same type and term. To estimate payments and total cost for a specific scenario, use the WhatIP loan-calculator or mortgage-calculator.