APR vs. interest rate: the basic difference
The interest rate generally describes the percentage charged for borrowing the principal balance. It is one of the main factors used to calculate interest and, for many installment loans, the required payment.
APR stands for annual percentage rate. Depending on the type of credit, APR can provide a broader measure of borrowing cost by incorporating the interest rate together with certain fees or finance charges.
Cost of borrowing the principal
The stated interest rate is used to determine interest charged on the outstanding loan balance.
A broader annualized borrowing measure
APR may incorporate the interest rate and certain applicable borrowing costs into one percentage.
The interest rate focuses primarily on the price of borrowing the principal. APR can make certain additional financing costs easier to compare by expressing them as part of an annualized percentage.
Why can APR be higher than the interest rate?
If a loan has costs that are included in the APR calculation, the APR can be higher than the stated interest rate.
Depending on the loan and applicable disclosure rules, these costs may include certain:
- Origination charges
- Loan fees
- Discount points
- Prepaid finance charges
- Other costs treated as finance charges
Not every fee associated with obtaining a loan is necessarily included in APR. The exact treatment can vary by the type of credit and the rules governing the disclosure.
Interest rate and APR side by side
| Feature | Interest Rate | APR |
|---|---|---|
| Expressed as a percentage | Yes | Yes |
| Reflects interest charged | Yes | Yes |
| May incorporate certain fees | Generally no | Yes, depending on the loan |
| Commonly affects payment calculation | Yes | Not normally used as the payment rate itself |
| Useful for comparing financing costs | Useful | Often provides broader context |
A simple APR comparison example
Imagine two lenders offer loans with similar terms. One loan has a slightly lower interest rate but charges more upfront financing fees.
Looking only at the interest rate might make Loan A appear less expensive. Looking at APR can provide additional information about how certain financing costs affect the comparison.
Does APR determine your monthly payment?
For many traditional installment loans, the contractual payment is generally calculated using the loan principal, stated interest rate and repayment term rather than by simply applying the disclosed APR as the payment rate.
That distinction is important. APR is primarily a comparison and disclosure measure, while the stated interest rate is generally one of the inputs used to calculate the interest portion of your loan payments.
Estimate APR using your own loan numbers
Enter the loan amount, interest rate, term and applicable financing charges to estimate how those costs may affect APR.
Use the APR CalculatorAPR on a mortgage
Mortgage disclosures commonly show both an interest rate and an APR. Because some mortgage financing charges may be incorporated into the APR calculation, the APR is often higher than the note rate.
However, APR should not be interpreted as including every expense associated with buying a home. Costs such as some property-related services, taxes, insurance or other closing expenses may be treated differently.
When comparing mortgages, it can therefore be useful to look at the interest rate, APR, lender charges, cash required at closing and the actual loan terms together.
APR on an auto loan
Auto financing is frequently advertised using APR because borrowers need a standardized way to compare borrowing costs.
When comparing car loans, also pay attention to the vehicle price, amount financed, down payment, trade-in, loan term and any products or charges being financed.
A low advertised APR does not necessarily mean the total transaction is inexpensive if the amount being financed is substantially higher.
APR on a personal loan
Personal loans may include origination fees or other borrowing costs. As a result, a loan's APR can provide useful context beyond the advertised interest rate alone.
For example, two loans can have similar stated interest rates but different fees. The loan with higher applicable financing charges may have the higher APR.
What about credit card APR?
Credit cards also disclose APR, but revolving credit works differently from a fixed installment loan.
A credit card may have separate APRs for purchases, balance transfers, cash advances or penalty situations. The amount of interest actually charged also depends on factors such as the account balance, transaction timing, payment behavior and any applicable grace period.
Because of those differences, you should not assume that the APR on a credit card functions exactly like the APR shown for a mortgage or personal loan.
How to compare two loan offers
APR is useful, but it should not be the only number you consider. A good comparison looks at the complete structure of each loan.
Is a lower APR always better?
A lower APR generally indicates lower annualized borrowing costs under the assumptions used in the APR calculation, but it does not automatically make one loan the right fit for every situation.
For example, the length of time you expect to keep a loan can matter. Paying significant upfront costs to obtain a lower rate may be less beneficial if the loan will be paid off, refinanced or replaced relatively quickly.
Loan features, prepayment terms, payment structure, cash required upfront and other conditions may also matter.
Questions to ask when the APR and rate are different
If you see a noticeable difference between a loan's stated interest rate and APR, review the loan disclosure carefully. Useful questions include:
- Which fees are included in the APR?
- Are discount points being charged?
- Is there an origination fee?
- Are any fees being financed into the loan?
- What is the total amount financed?
- How much cash is required upfront?
- What is the total repayment amount?
The interest rate tells you important information about the cost of borrowing the principal. APR can provide a broader comparison by incorporating certain additional financing costs. When comparing loans, review both numbers along with the term, fees and total cost.