Annual Percentage Rate (APR)

Annual percentage rate (APR) summary:

• The annual percentage rate represents the total cost of borrowing, including interest and fees.

• It’s possible for a loan with a lower interest rate to cost less than a loan with a higher interest rate, once you take fees into account.

• Comparing the APR could give you a more complete and accurate picture of what a particular loan will cost. 

• A fixed APR won’t change during the life of the loan. A variable APR could change.

Annual percentage rate definition and meaning

Annual percentage rate or APR represents the cost of borrowing money over one year. APR is calculated using the interest rate and fees a lender charges for a loan or line of credit.

APR allows borrowers to make apples-to-apples comparisons between multiple loan products. A higher APR indicates a higher cost of borrowing, while a lower APR suggests a less expensive loan. 

Loans and lines of credit typically have just one APR, which may be fixed or variable. Credit cards can have multiple APRs that apply to different types of transactions. 

Annual percentage rate (APR) comprehensive breakdown

Annual percentage rate is the one-year cost of borrowing money, based on the interest rate and fees you pay. When you apply for a loan, line of credit, or credit card, the lender should clearly state what the APR will be and whether that rate is fixed or variable. 

Here's the difference between the two:

• A fixed APR doesn't change over the life of the loan. That means your monthly loan payments won't change either, and you can easily calculate how much interest you'll pay altogether. (If you have a fixed-rate line of credit, your monthly payment could change if your balance fluctuates, but the APR would remain consistent.)

• A variable APR could increase or decrease over time, based on shifts in an underlying benchmark rate. If your APR goes up, your cost of borrowing—and your monthly payments—increase. 

APR is a helpful way to compare costs when you plan to borrow. You can see at a glance which loan is likely to be more or less expensive, based on the APR you'll pay. 

How APR is calculated

APR is calculated using a multi-step process. You don’t need to know any math formulas, and you can use a standard calculator. . 

First, you'll need to know the principal loan amount, the total amount of interest you’ll be charged, and the fees. To find the total amount of interest, plug the loan details into an online loan calculator and make note of the total interest charge.

To find APR, do this: 

1. Multiply the loan balance by the interest rate.

2. Multiply the result by the number of years in the loan. 

3. Add the fees.

4. Divide that number by the loan principal.

5. Divide by the number of days (not years) in the loan term. For example, a 10-year loan term has 3,652 days.

6. Multiply the result by 365.

7. Multiply again by 100.

A $10,000 personal loan with a 12% interest rate, $500 lender fee, and three-year repayment term has an APR of 13.66%. 

For credit cards, the APR is the same as the interest rate. Credit cards do sometimes charge fees, but not as a cost of borrowing. For instance, the annual fee is for owning the account, whether you borrow against the card or not.

For a loan that has fees, the APR is higher than the interest rate. That’s why it’s important to compare the APR, not the interest rate. A loan with a lower interest rate could be more expensive than a similar loan that has a higher interest rate but lower fees.

Where do you find the APR?

Creditors in the U.S. are required to tell you the APR when you apply for a loan or other credit account. For credit card accounts, you’ll also find the APR on every monthly statement. You could also use an APR calculator to do the math when comparing mortgage loans, home equity lines of credit (HELOCs), student loans, personal loans, or credit cards. 

Types of APR

APRs can be fixed or variable, but you may encounter other terms to describe them. For instance, if you open a credit card, your account agreement may mention these types of APR:

• Purchase APR. This is the APR that applies to purchases you charge to your card.

• Balance transfer APR. If your card allows balance transfers, a separate APR may apply to those transactions. 

• Cash advance APR. A cash advance allows you to pull cash from your card's credit limit. Cash advance APRs tend to be higher than purchase or balance transfer APRs. 

• Penalty APR. A penalty APR may apply if you miss one or more payments to your card. 

Some cards offer a promotional APR, which is an introductory rate that applies for a certain period. For instance, you may have a card with a 0% promotional APR on purchases for the first 12 months.