SmartRateToolsDefinition
Annual Percentage Rate (APR) is the yearly cost of borrowing money, expressed as a percentage. It represents the interest rate on a loan or credit product on an annual basis — without accounting for the effect of compounding within the year.
What APR includes
APR can include more than just the interest rate. Depending on the loan type, it may also factor in:
- Origination fees
- Closing costs (for mortgages)
- Mortgage broker fees
- Other lender charges
This makes APR a more complete picture of borrowing cost than the raw interest rate alone — but the inclusions vary by lender and loan type, so always verify what's baked in.
APR vs. interest rate
For a mortgage, you might see an interest rate of 6.5% and an APR of 6.78%. The difference is the fees folded into the APR calculation. When comparing loan offers, compare APRs — not just interest rates — to get a true side-by-side comparison.
APR vs. APY
APR doesn't account for compounding. APY (Annual Percentage Yield) does. A 24% APR credit card that compounds monthly has an effective APY of about 26.8% — meaning you're actually paying more than the stated rate if you carry a balance. Lenders use APR because it looks lower; savings accounts use APY because it looks higher.
When you'll see APR
- Credit cards — U.S. law requires APR disclosure
- Mortgages — both rate and APR are typically quoted
- Personal loans — comparison shopping standard
- Auto loans — dealerships and lenders both quote APR
The bottom line
When borrowing, a lower APR means less cost. Use APR as your primary comparison metric when evaluating loan offers. For savings products, focus on APY instead.