APR vs. Interest Rate: What's the Difference?
How an interest rate and an APR differ, what each one includes, and how to use APR to compare borrowing offers on equal terms.
When you borrow money, you'll usually see two percentages: an interest rate and an annual percentage rate, or APR. They're often close, and sometimes identical, which makes it easy to treat them as the same thing. They aren't quite. Knowing the difference can help you compare offers more accurately and notice when a low advertised rate comes with costs that raise the real price of borrowing.
The interest rate: the cost of borrowing the money itself
The interest rate is the percentage a lender charges on the amount you borrow, which is called the principal. It's expressed as a yearly rate. On an installment loan, it determines how much interest is built into each payment. On a credit card, it determines how much interest is added when you carry a balance.
The interest rate doesn't include fees. Two loans with the same interest rate can cost different amounts if one charges an upfront fee and the other doesn't.
APR: a broader measure of the yearly cost
APR is designed to show the yearly cost of credit, including the interest rate plus certain fees, as a single percentage. Under the federal Truth in Lending Act, lenders must disclose the APR, which helps borrowers compare offers on more equal terms.
For a personal loan, the APR may include an origination fee, which is a charge for processing the loan. For a mortgage, it can include some closing costs and fees such as points. Because these costs are folded in, the APR on a loan with fees will be higher than its interest rate. If a loan has no such fees, the APR and the interest rate may be the same.
How APR works on credit cards
Credit cards are a special case. A card's APR is generally its interest rate; it doesn't usually fold in fees such as annual fees or late fees. Those are listed separately in the card's terms.
Many cards have more than one APR. A purchase APR applies to everyday purchases, a balance transfer APR applies to debt moved from another card, and a cash advance APR applies to cash withdrawals and similar transactions. Some cards also have an introductory APR for a limited time, and a penalty APR that may apply after certain events, such as a late payment, depending on the card's terms.
Although APR is a yearly rate, card interest is usually charged monthly. Many issuers divide the APR by 365, or sometimes 360, to get a daily periodic rate and apply it to your balance each day of the billing cycle. If your card has a grace period and you pay your full statement balance by the due date, you generally won't be charged interest on new purchases. Cash advances usually don't have a grace period.
Many card APRs are variable, meaning they're tied to an index, such as the prime rate, plus a set margin. When the index changes, your APR can change too.
Example: comparing two loan offers
Here's a hypothetical example with round, illustrative numbers. Imagine two offers for a $10,000 personal loan, each repaid over three years with fixed monthly payments. Example Loan B has a lower interest rate but charges an origination fee of $500, which is subtracted from the amount you receive.
| Example detail | Example Loan A | Example Loan B |
|---|---|---|
| Amount borrowed | $10,000 | $10,000 |
| Interest rate | 10% | 9% |
| Origination fee | $0 | $500 |
| Amount you receive | $10,000 | $9,500 |
| Monthly payment (approx.) | $323 | $318 |
| Total interest over 3 years (approx.) | $1,616 | $1,448 |
| Interest plus fee (approx.) | $1,616 | $1,948 |
| APR (approx.) | 10.0% | 12.5% |
Loan B's lower interest rate makes its monthly payment slightly smaller, but once the fee is included, it costs more overall. The APR reflects that: Loan B's APR is higher even though its interest rate is lower. Figures are rounded, and real offers can handle fees and payments differently.
Where APR has limits
- It assumes you keep the loan for the full term. If you pay off a loan with an upfront fee early, that fee is spread over a shorter time, so your actual yearly cost ends up higher than the APR suggested.
- It doesn't include every possible cost. Late fees, returned-payment fees and some other charges usually aren't part of the APR.
- It works best for like-for-like comparisons. APR is most useful when loan amounts and terms are similar. A longer loan can have a lower APR and still cost more in total interest.
- A variable APR can change. The rate you see at the start may not be the rate you pay for the life of the balance.
APR vs. APY
You may also see APY, or annual percentage yield, usually on savings accounts and certificates of deposit. APY reflects compounding, meaning it accounts for earning interest on interest you've already earned over a year. APR is a simple yearly rate that doesn't reflect compounding. Put simply, APY usually describes what you earn, and APR usually describes what you pay.
A simple way to compare borrowing offers
Match the basics
Line up offers for the same loan amount and repayment term.
Compare the APR
For loans, the APR gives a fuller picture than the interest rate alone.
Check the total cost
Look at the total you'd repay over the life of the loan, including fees.
Read the fine print
Note whether the rate is fixed or variable, whether there's a prepayment penalty, and which fees aren't included in the APR.
Is a lower APR always the better deal?
For offers with the same amount and term, a lower APR generally means a lower cost of borrowing. It's still worth comparing the total repayment amount, the monthly payment you can manage, and features such as whether the rate is fixed.
Why is my credit card's APR the same as its interest rate?
For credit cards, the APR generally reflects interest only. Fees like annual fees and late fees are disclosed separately rather than built into the APR.
What is a penalty APR?
A penalty APR is a higher rate that a card issuer may apply after certain events, such as a late payment, if the card's terms allow it. The terms explain when it can apply and how it can end.
Does APR include compounding?
Generally, no. APR is a simple yearly rate. On a credit card, interest is often calculated daily and added to your balance, so carrying a balance for a full year can cost somewhat more than the APR alone suggests.