The interest rate tells you part of the cost of borrowing. APR is designed to show more of the picture.
Key takeaways
- APR, or annual percentage rate, expresses the yearly cost of borrowing as a percentage.
- For many loans, APR includes certain fees, so it’s often higher than the interest rate.
- Lenders generally must disclose the APR before you sign, which makes offers easier to compare.
- For credit cards, the APR and the interest rate are usually the same, but a card can have several APRs.
When you borrow money, you’ll usually see two numbers: the interest rate and the annual percentage rate, or APR. Knowing the difference helps you compare offers fairly and spot the true cost of a loan.
Interest rate vs. APR
| Interest rate | APR | |
|---|---|---|
| What it shows | The cost of borrowing the principal | The yearly cost, including certain fees |
| Includes fees | No | Often, such as origination fees on many loans |
| Best use | Understanding your payment | Comparing offers |
The federal Truth in Lending Act generally requires lenders to disclose the APR, so you can compare credit offers on similar terms.
What APR can include
- Interest on the amount borrowed.
- Certain lender fees, such as origination fees or points on some loans.
- Not every cost is included, so read the disclosure for details.
APR on credit cards
- Purchase APR applies to purchase balances you carry from month to month.
- Balance transfer APR applies to balances moved from another card.
- Cash advance APR is often higher, usually with no grace period.
- Penalty APR may apply after late payments.
Be aware
Cash advances on credit cards often start charging interest right away and may carry extra fees. Check your card’s terms before using one.
How to compare offers
- Compare APRs for the same loan amount and term.
- Look at the total cost over the full term, not just the monthly payment.
- Check for fees that aren’t included in the APR, and for prepayment penalties.
- Find out whether the rate is fixed or variable.
Money tip
When comparing loans with different terms, ask for, or calculate, the total amount you’ll repay. A longer term can lower the monthly payment but raise the total cost.
Where to find the APR
- Loan disclosures: lenders must show the APR in the documents you receive before signing.
- Credit card applications: rates and fees are summarized in a standard table on the application or offer.
- Monthly statements: your card statement lists the APRs that apply to each type of balance.
Fixed and variable APRs
- Fixed APRs stay the same for the life of the loan, which makes payments predictable.
- Variable APRs move with a benchmark rate, so payments can rise or fall.
- Most credit cards have variable APRs, while many personal loans are fixed.
The bottom line
Use APR to compare borrowing costs, look at the total cost over the full term, and read the fine print for fees and variable rates. See how APR fits into choosing between a personal loan and a credit card, and how your credit score affects the rates you’re offered.
Common questions
What’s the difference between APR and APY?
APR describes the cost of borrowing. APY, or annual percentage yield, describes what you earn on savings, including compounding.
Is a lower APR always better?
Usually, but also compare the loan term, total cost and fees. A longer term with a lower APR can still cost more in total interest.
Why does my credit card have several APRs?
Cards can have separate APRs for purchases, balance transfers and cash advances, plus a penalty APR that may apply after late payments.
This article is for general information and education only and isn’t personal financial, tax or legal advice. Rates, fees and rules change, so check current details with the provider or an official source before making decisions.