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APR (Annual Percentage Rate)
Definition
APR is the total annual cost of borrowing including the interest rate and all fees, expressed as a percentage.
Explanation
APR provides a more complete picture of borrowing costs than the nominal interest rate alone because it includes lender fees, points, and other charges. This makes it easier to compare different loan offers. The APR is typically higher than the stated interest rate.
By law, lenders must disclose the APR on all consumer loans and credit cards. When comparing loans, the lowest APR generally means the lowest total cost, assuming all other terms are similar.
Example
A loan with a 5% interest rate but 3% in fees might have an APR of 5.5%. Comparing APRs rather than rates gives a truer cost comparison.