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

When you shop for a loan, you'll usually see two percentages: the interest rate and the APR. They sound similar, but they measure different things — and using the wrong one can make an expensive loan look cheap.

Interest rate

The interest rate is the yearly cost of borrowing the principal, expressed as a percentage. It is what determines your monthly payment. It does not include any upfront fees.

APR (annual percentage rate)

The APR includes the interest rate plus certain fees, such as origination fees, spread over the life of the loan and expressed as a yearly rate. In the United States, the Truth in Lending Act requires lenders to disclose APR so borrowers can compare offers on equal footing.

Because it includes fees, APR is usually equal to or higher than the interest rate. If a loan has no fees, the two are the same.

Example

You borrow $10,000 for 3 years at 10% interest. The monthly payment is about $323. But the lender charges a $400 origination fee taken out of the loan, so you only receive $9,600.

You are paying $323 a month for $9,600 of actual cash, which works out to an APR of roughly 12.8%, even though the interest rate is 10%. A competing offer at 11% with no fees would actually be cheaper.

When APR can mislead

• Paying off early: APR assumes you keep the loan for the full term. If you repay early, upfront fees make the effective cost higher than the APR suggests.
• Mortgages: mortgage APR includes some closing costs but not all of them, and different lenders may count fees differently.
• Credit cards: for credit cards, APR and interest rate are essentially the same thing, since there's no upfront fee built in. Annual fees and balance transfer fees are separate.
• Variable rates: the APR shown may change if the loan's rate is tied to an index.

How to compare loan offers

1. Compare APRs for loans with the same term.
2. Check the monthly payment to make sure it fits your budget.
3. Look at total cost: all payments plus any fees.
4. Ask about prepayment penalties if you might pay early.

Our personal loan calculator lets you add an origination fee and shows the cash you'll receive and the true borrowing cost side by side.