Annual percentage rate (APR)
The yearly cost of borrowing expressed as a percentage, which for many loans includes certain fees as well as interest.
What it means
APR is the standardized annual rate lenders must disclose under the federal Truth in Lending Act so borrowers can compare credit offers. For installment loans such as mortgages, APR folds in certain upfront costs like origination fees and discount points, so it is often higher than the note rate. For credit cards, APR is essentially the interest rate, and a card may have different APRs for purchases, cash advances and balance transfers.
APR does not reflect compounding. A credit card typically charges a daily periodic rate (APR divided by 365, or by 360 at some issuers) and compounds it, so the effective yearly cost is somewhat higher than the stated APR. Which fees are included can vary, so APR is a strong but imperfect comparison tool.
Example
Suppose a credit card has a 24% APR and you carry a $2,000 balance for a month. Using a simplified monthly rate of 2% (24% ÷ 12), you would pay about $40 in interest. Over a full year with monthly compounding, the effective rate would be about 26.8%.
How it’s used
- Comparing mortgage, auto and personal loan offers
- Understanding the cost of carrying a credit card balance
- Spotting loans with high fees hidden behind a low rate
Good to know
- Compare APRs for loans with the same term and type; a shorter or longer term changes the picture.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.