What Is APR (Annual Percentage Rate)?
APR stands for annual percentage rate. It expresses the yearly cost of borrowing money as a percentage of the amount borrowed, and it includes the interest charged plus some fees. Lenders are generally required to disclose APRs so that consumers can compare credit products such as student loans, credit cards, car loans and mortgages on a similar basis.
APR versus interest rate
The interest rate is the percentage charged on the outstanding balance. The APR includes the interest rate and certain additional costs, such as origination fees, so it reflects the total cost more completely. A loan with a lower interest rate but high fees may have a higher APR than one with a slightly higher rate but no fees.
For credit cards, the APR typically refers to the interest rate on purchases, and different APRs may apply for cash advances, balance transfers and penalty rates.
Fixed and variable APRs
- Fixed APR: the rate stays the same for the life of the loan, giving predictable payments.
- Variable APR: the rate can change with an index such as a benchmark interest rate, so payments may rise or fall.
Many private student loans offer both options. Variable rates may start lower but carry the risk of increases.
How to compare
- Compare APRs for the same loan type and term. A longer loan has lower monthly payments but more total interest.
- Check the total cost, not just the monthly payment.
- Read about fees, including origination, late and prepayment fees.
- Consider whether the rate is fixed or variable, and any limits on changes.
- Look at repayment flexibility, such as deferment and income-based options.
- Check cosigner options.
Example
If you borrow $10,000 with a 6 percent interest rate and a 2 percent origination fee, the APR will be higher than 6 percent, because of the fee. The exact figure depends on the loan term.
Limits
APR is useful but not perfect. It may not include every cost, and the calculation assumes the loan is held for the full term. Always read the loan agreement and ask the lender to explain unclear terms.
Related terms
See interest capitalization, cosigner, loan servicer, compound interest and credit utilization.
Frequently asked questions
Is APR the same as the interest rate?
Not exactly. The interest rate is the cost of borrowing the principal. APR also includes certain fees and costs, so it can be higher and gives a fuller comparison.
What is a good APR?
It depends on the type of credit and your profile. Compare offers for the same product. Lower is better, and fixed or variable terms also matter.
Does APR apply to student loans?
Private student loans usually quote APRs. Federal student loans in the US have fixed interest rates and fees, and the figures can be compared with other offers.