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.