Annual Percentage Rate (APR)

The true annual cost of borrowing, including interest and fees

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Definition

APR is the true annual cost of borrowing, expressed as a percentage. Unlike the interest rate, APR includes lender fees and closing costs spread over the life of the loan, giving you a more complete picture of what a loan actually costs.

Example

A mortgage with a 6.5% interest rate and $5,000 in lender fees on a $280,000 loan might have an APR of approximately 6.67%. Lenders are required by law to disclose APR, making it the best number to use when comparing loan offers.

How It's Calculated

APR incorporates fees into the effective rate. Lenders add all fees to total interest paid, then express that as an annual percentage of the loan amount over the full term.

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Related Terms

APR is the standardized measure that lets you compare the true cost of different loans on an apples-to-apples basis. When comparing mortgage offers or auto loans, always look at APR rather than the interest rate alone — a low rate with high fees can cost more than a slightly higher rate with no fees.