Quick answer
APR is a loan's interest rate plus the lender's fees, shown as one yearly number. Compare loans by APR, because the rate alone is only part of the cost. (800) 236-7761 or use the form to see which lenders can work with you today.
APR vs Interest Rate: What APR Really Means
A loan's interest rate is the cost of borrowing the principal. The APR is that interest rate plus the lender's fees, rolled into a single yearly percentage. Because it includes fees, the APR is the number to compare when you shop, while the interest rate alone tells you only part of the story.
Interest rate and APR, side by side
The interest rate is the cost you pay to the lender for borrowing money, charged on top of the loan amount, or principal. The higher the interest rate, the more you pay over the life of the loan.
The annual percentage rate (APR) is the interest rate plus any additional fees the lender charges. That includes origination charges and other fees charged when the loan is made. So the APR is a broader measure of price than the interest rate by itself.
Why the APR is the fairer comparison
Two loans can advertise the same interest rate and still cost different amounts once fees are added. The APR folds those fees in, so it reflects the true yearly cost of borrowing.
The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures about a loan's important terms, including the APR, before you finalize it. Because every lender must disclose an APR, it is the one figure you can line up across offers.
One caution: compare APR to APR, not APR to interest rate. The two are not the same measure, and mixing them makes a loan look cheaper or dearer than it is.
What is inside the APR
- Interest on the principal — the base cost of borrowing.
- Origination and other loan fees — charges the lender adds when the loan is made.
- The term of the loan — how long you have to repay shapes the yearly figure.
Fees spread over a short term push the APR up sharply. A loan repaid in two weeks, for example, has little time over which to spread its costs.
A payday example
The CFPB explains that a typical two-week payday loan charging $15 per $100 borrowed carries an APR of almost 400 percent. For comparison, credit card APRs commonly run from about 12 percent to about 30 percent. The gap is not a trick of the math; it reflects how large the fee is relative to a short repayment window.
Regulation Z and advertising
Regulation Z (12 CFR 1026.24) governs how credit is advertised. Certain terms trigger a duty to add more disclosures. Stating the amount or percentage of a down payment, the number of payments or period of repayment, the amount of any payment, or the amount of any finance charge triggers additional disclosures, such as the APR and the terms of repayment. Stating an APR on its own is not one of those triggering terms.
How to use the APR when you shop
- Ask for the APR in writing. TILA requires it before you finalize the loan.
- Compare like with like. Same amount, same term, APR against APR.
- Read the total cost. Add up what you will repay, not just the rate.
- Shop more than one lender. Lenders are not required to offer you their best rate, and a higher credit score generally means lower rates, but only shopping around reveals the best offer you can actually get.
- Check the term. A lower APR over a much longer term can still mean paying far more in total.
Where to go next
If you want to see how rates and fees compare across loan types, the rates-and-fees page lays out the bands we use. To understand what moves the rate you are offered, read how to improve your credit score. If a short-term loan is on your mind, payday alternative loans from credit unions are worth knowing about.
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Frequently asked questions about apr vs interest rate: what apr really means
What is the difference between an interest rate and an APR?
The interest rate is the cost you pay the lender for borrowing the money, charged on the amount you borrow. The APR is that interest rate plus additional fees charged by the lender, such as origination charges. Because the APR includes fees, it usually runs higher than the interest rate and is the better number for comparing two loans.
Why do lenders have to show the APR?
The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures about the important terms of a loan, including the APR, before you finalize it. Because every lender must provide the APR, you can compare one loan's APR against another's.
Should I compare APR to APR, or APR to interest rate?
Compare APR to APR. The two measures are not the same, so putting one loan's APR next to another loan's interest rate gives a misleading comparison. Line up the APRs to see which offer costs less for the same amount and term.
Why is the APR on a payday loan so much higher than on a credit card?
Short-term loans are usually repaid in a few weeks, and their fees are large relative to the small amount borrowed. The CFPB notes that a typical two-week payday loan with a $15 fee per $100 borrowed works out to an APR of almost 400 percent, while credit card APRs commonly range from about 12 to 30 percent.
Does a higher credit score lower my APR?
In general, the higher your credit score, the lower the rates you are offered. However, lenders and dealers are not required to offer you their best available rate, so shopping around and comparing APRs between lenders is the most reliable way to reduce what you pay.