Annual percentage rate (APR) is an annualized measure of the cost of consumer credit that relates the amount and timing of money received to the amount and timing of payments. It generally includes the interest rate and certain finance charges required by applicable disclosure rules, but it is not the same as total interest paid or a complete forecast of every borrowing cost.
Use APR to compare similar credit offers, then check the payment, fees, term, rate changes, and other contract terms. The calculation and included charges depend on the type of credit.
APR vs. interest rate
The interest rate is the lender’s charge for the use of principal. APR is a broader annualized comparison measure that can include interest and certain eligible finance charges, such as some origination charges or mortgage points. Which charges count depends on the transaction and the applicable rules; APR does not necessarily include every fee, and it is not always higher than the stated interest rate.
| Measure | What it describes | What to remember |
|---|---|---|
| Interest rate | The stated price of borrowing principal | Does not by itself show all eligible credit costs. |
| APR | An annualized measure based on the amount and timing of credit received and payments made | Useful for comparing similar offers, but not a full cost or affordability measure. |
| APY | Annualized yield on a deposit account, including the effect of compounding | Measures interest earned, not the cost of borrowing. |
Regulation Z governs consumer-credit disclosures in the United States. Its APR rules differ by product. APR is a standardized rate for comparison, not the same as a monthly payment, total finance charge, total interest paid, or deposit-account yield.
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How APR is calculated
For closed-end credit, such as a typical installment loan, APR is calculated from the amount financed, applicable finance charges, and the timing of advances and scheduled payments. In simplified terms, the calculation finds the periodic rate that makes the present value of scheduled payments correspond to the amount financed, then expresses that rate annually under the applicable method.
A conceptual equation is: amount financed = the sum of each scheduled payment discounted by the periodic rate for its payment interval. This is only an explanation of the idea, not a formula for determining a legally disclosed APR. Actual calculations can involve irregular timing, multiple advances, rounding, and transaction-specific rules. For equal payment intervals, Regulation Z prescribes actuarial or U.S. Rule methods that produce the same APR.
Simplified example
Suppose a borrower receives $10,000 after a $300 eligible finance charge is withheld and makes 36 equal monthly payments of $330. The APR calculation treats the borrower as receiving the net amount financed and making the scheduled payments at their stated times. Because the borrower receives less than the nominal principal while making the scheduled payments, the APR will generally exceed the note rate in this kind of example. The exact disclosed APR requires the applicable Regulation Z method and rounding rules; this illustration is not a hand-calculated APR quote.
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APR by type of credit
Installment loans
For a typical closed-end personal or auto loan, the APR reflects the cash-flow calculation for the amount financed, eligible finance charges, and scheduled payments. Compare offers with similar amounts, terms, and repayment structures. Review the dollar fees and payment schedule as well as APR.
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Credit-card APR disclosures follow different rules from conventional installment loans. A card can have separate APRs for purchases, balance transfers, and cash advances, and a rate may be fixed or variable. Regulation Z permits specified periodic-rate methods for open-end credit; a periodic rate may be annualized in accordance with the applicable disclosure method.
Check the APR for each balance type, any introductory-rate expiration, the grace period, annual and late fees, penalty terms, and how the balance and interest are calculated. The APR alone does not show what a particular cardholder will pay, because that depends on balances and payment behavior.
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Mortgages
A mortgage Loan Estimate shows the interest rate and APR separately. Mortgage APR can reflect points, mortgage-broker fees, and other charges paid to obtain the loan, as defined by the applicable rules. Use Loan Estimates to compare mortgages with the same type, term, repayment structure, and comparable assumptions. Review the payment, closing costs, and other comparison figures too.
An adjustable-rate mortgage APR does not show the loan’s maximum possible interest rate. Do not casually compare a closed-end mortgage APR with a home-equity line APR: the products and the charges included in their disclosures differ.
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Short-term credit
A fixed fee on a short borrowing period can produce a very high annualized APR. The CFPB gives the example of a $15 charge for borrowing $100 for two weeks, which can translate to an APR near 400%. The high annualized figure reflects, in large part, expressing a short-term fee as an annual rate.
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For short-term credit, compare the dollar fee, due date, repayment burden, rollover rules, and consequences of nonpayment as well as APR. Do not treat the annualized rate as the amount of interest you will necessarily pay over the short loan period.
How to compare APRs responsibly
- Compare APR with APR, not APR with a nominal interest rate.
- Compare the same kind of product and, as closely as possible, the same loan amount, term, and repayment structure.
- Check whether the rate is fixed, variable, promotional, or subject to a later reset.
- Review the finance charge, origination charges, points, annual fees, and other disclosed costs.
- Compare the monthly payment and total payments or interest as well as APR. For mortgages, review the Loan Estimate’s comparison figures.
- Check prepayment penalties, balloon payments, late fees, collateral requirements, and other risks.
- For credit cards, compare purchase, balance-transfer, and cash-advance APRs separately and read the periodic-rate and grace-period disclosures.
- For short-term loans, compare the dollar fee and repayment burden alongside the annualized APR.
- Treat online calculator results as estimates unless the calculator uses the required disclosure methodology and inputs.
What APR does not tell you
- Every cost: The charges included depend on the relevant rules, and some costs may be excluded or treated under specialized rules.
- Affordability: APR does not tell you whether the payment fits your budget or whether the loan is suitable for your circumstances.
- Future variable rates: A disclosed variable-rate APR does not predict future rate changes or, for an adjustable-rate mortgage, show the maximum possible rate.
- Your exact cost if circumstances change: Early payoff, refinancing, or a different payment pattern can change the cost compared with the scheduled assumptions.
- All product risks: Review payment changes, prepayment terms, balloon payments, collateral, taxes, insurance, and other contract features separately.
FAQ
Is APR always higher than the interest rate?
No. APR can be higher when eligible finance charges increase the annualized cost, but the result depends on the transaction and disclosure rules. Do not assume every fee is included or that APR must always exceed the interest rate.
Does APR tell me how much interest I will pay?
No. APR is an annualized comparison measure, not the total interest paid or a complete calculation of every dollar spent. Check the payment schedule and total-payment or total-interest information where available.
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Can I compare a credit-card APR with a mortgage APR?
They both describe credit costs on an annualized basis, but they follow different product rules and reflect different structures. For a useful comparison, compare offers within the same product category and review the terms that determine actual costs.
Where can I find a mortgage APR?
Mortgage lenders show the APR separately from the interest rate on the standardized Loan Estimate. Compare Loan Estimates for the same kind of mortgage and review the payment, closing costs, and other terms alongside APR.
What should I check besides APR?
Check the amount financed, fees, payment and term, total payments, whether the rate can change, and any prepayment penalty or balloon payment. For cards, also check the APR for each balance type, grace period, and applicable fees.
Use the official disclosure and loan or account terms rather than relying on an advertised rate alone. APR is a useful starting point for comparing similar credit offers, but it is not a substitute for reviewing the full terms.
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