APR Calculator
APR Tips
- •APR includes fees, making it better for loan comparisons
- •Lower APR means lower total borrowing cost
- •Lenders are required to disclose APR by law
- •APR can vary significantly between lenders
Understanding APR
What is APR?
The Annual Percentage Rate (APR) represents the true yearly cost of borrowing money, expressed as a percentage. Unlike the nominal interest rate, APR includes additional costs such as origination fees, closing costs, and other charges.
APR vs Interest Rate
Interest Rate
The basic cost of borrowing the principal amount. Does not include fees or other charges. Used to calculate your actual monthly payment.
APR
The total cost of borrowing including interest and fees, expressed as a yearly rate. Better for comparing different loan offers.
Common Fees Included in APR
- Origination fees: Charged by lenders to process the loan
- Application fees: Cost to apply for the loan
- Underwriting fees: Cost to evaluate and verify loan application
- Closing costs: Various fees to finalize the loan (mortgages)
- Discount points: Upfront fees to lower the interest rate
Types of APR
Fixed APR
Stays the same for the entire loan term. Provides predictable payments and easier budgeting.
Variable APR
Can change based on an index rate like Prime Rate. May start lower but can increase over time.
Important Considerations
- • APR is most useful for comparing similar loan products
- • For short-term loans, fees have a larger impact on APR
- • Credit card APRs are typically much higher than loan APRs
- • Some costs like late fees are not included in APR calculations
Frequently Asked Questions
What is the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal loan amount, while APR (Annual Percentage Rate) includes the interest rate plus all other fees and costs associated with the loan, such as origination fees, closing costs, and discount points. APR gives you a more complete picture of the total cost of borrowing.
Why is my APR higher than my interest rate?
Your APR is higher than your interest rate because it includes additional costs like loan origination fees, mortgage insurance, closing costs, and discount points. The more fees a loan has, the larger the gap between the interest rate and APR. A loan with a lower interest rate but high fees could have a higher APR than one with a slightly higher rate but fewer fees.
Should I compare loans using interest rate or APR?
Use APR when comparing similar loan products with the same term length. APR accounts for fees and gives a better comparison of total borrowing costs. However, if you plan to pay off the loan early or refinance, the interest rate might be more relevant since you won't pay all the fees over the full loan term.
What is a good APR for a personal loan?
A good APR for a personal loan depends on your credit score and current market conditions. Generally, borrowers with excellent credit (750+) can expect APRs between 6-12%, good credit (700-749) around 12-18%, fair credit (650-699) around 18-25%, and poor credit may see 25-36% or higher. Always compare multiple lenders to find the best rate for your situation.