What is APR (Annual Percentage Rate)?

The Simple Definition

APR (Annual Percentage Rate) is the true, bottom-line cost of borrowing money for a year.

Unlike a standard "interest rate," the APR includes the interest rate PLUS any fees the lender charges you to get the loan (like origination fees, closing costs, or broker fees). Because it includes fees, the APR gives you a much more accurate picture of what a loan will actually cost you.

Interest Rate vs. APR: What's the Difference?

For example, imagine you are buying a house and looking at two mortgage offers:

• Lender A: 6.0% Interest Rate. But they charge $5,000 in closing fees. Their APR might be 6.2%.
• Lender B: 6.1% Interest Rate. But they charge $0 in closing fees. Their APR is exactly 6.1%.

If you only looked at the interest rate, Lender A looks cheaper. But the APR reveals that Lender B is actually the cheaper loan overall because they aren't charging you hidden fees.

How APR Works on Credit Cards

Credit cards generally do not charge upfront origination fees to open the account. Therefore, on a credit card, the Interest Rate and the APR are usually the exact same number.

Credit card APRs are notoriously high (often 20% to 30%). To figure out how much a credit card charges you every month, you simply take your APR and divide it by 12. For example, a 24% APR card charges you 2% in interest every single month you carry a balance.