What APR tells you
A loan’s interest rate sets your monthly payment. Its annual percentage rate (APR) also accounts for fees you pay to get the loan, such as origination fees, discount points and some closing costs. Because fees reduce the cash you actually receive while the payments stay the same, the APR is always at least as high as the interest rate. The federal Truth in Lending Act requires lenders to disclose it.
How APR is calculated
First the payment is calculated on the full loan amount at the stated rate. APR is then the rate that makes those same payments equal to the amount you receive after fees:
There is no closed-form solution, so the calculator solves it numerically.
Example
A $20,000 five-year loan at 6.5% has a payment of $391.32. With $500 in fees you only receive $19,500, which pushes the APR to 7.563% — more than a full point higher than the advertised rate.
Using APR to compare loans
- Compare APRs for loans with the same term; fees have a bigger effect on short loans than long ones.
- A low-rate loan with high fees can cost more than a slightly higher-rate loan with none.
- If you’ll repay or refinance early, upfront fees are spread over fewer months and the effective cost is even higher than the APR suggests.
Related Borrowing & Interest Rate Tools
Evaluating financing options requires uncovering true borrowing fees. Compute exact amortization schedules using our Loan Calculator, contrast borrowing costs against compounding deposit yields with the APY Calculator, model vehicle financing terms using the Auto Loan Calculator, and calculate full home financing costs via the Mortgage Calculator.
Frequently asked questions
Why is my APR higher than my interest rate?
Because APR includes the fees you paid to get the loan. If a loan has no fees, the APR and the interest rate are the same.
What's the difference between APR and APY?
APR is used for loans and doesn't include compounding within the year. APY is used for savings and includes compounding, so it shows what you actually earn.
Which fees should I include?
Include charges you must pay to get the loan: origination or underwriting fees, discount points and lender-required closing costs. Don't include costs you'd pay anyway, like a home appraisal you ordered yourself or property taxes.