Annual Percentage Rate (APR) represents the true annual cost of a loan or credit card balance. Unlike a simple interest rate, APR includes origination fees, closing costs, and other charges rolled into one number so you can compare offers fairly.
APR vs. Interest Rate
The interest rate is the base cost of borrowing. APR adds lender fees on top, making it always equal to or higher than the interest rate. Federal law (Truth in Lending Act) requires lenders to disclose APR.
Types of APR
- Fixed APR — stays the same for the life of the loan
- Variable APR — fluctuates with a benchmark rate (e.g., prime rate)
- Introductory APR — temporary low rate (often 0%) for new credit cards
How to Compare APRs
When shopping for a mortgage or auto loan, always compare APRs, not just interest rates. A loan with a lower interest rate but high fees can have a higher APR — meaning it costs more overall.
Common Mistake: "0% Intro APR"
A 0% introductory APR on a credit card only applies for a limited window (often 12–21 months). After it expires, the rate jumps to the card's standard APR — frequently 20%+. If you carry a balance past the promo period, interest accrues retroactively on some cards ("deferred interest" promotions), so read the terms before assuming the 0% is risk-free.
APR on Different Products
Mortgages typically show APR alongside the note rate because closing costs are spread over 30 years, making the gap small (often 0.1–0.3 points). Credit cards show a bigger gap between "interest rate" and APR because annual fees and penalty rates factor in — always compare the APR, not the teaser rate, when shopping card offers.