What Is APR? A Guide for Consumers

What is APR and why does it matter? If you’re thinking of borrowing money, APR—or annual percentage rate—is a key consideration. Let’s walk through the details and clarify this important financial term.

APR defined

All loans involve the transfer of money from a lender to a borrower, with the understanding that the money will be repaid. Borrowers generally pay interest—a percentage of the borrowed amount—to the lender as compensation for the loan.

APR is a broader measure of what it costs to borrow money. It typically includes the interest payable on the amount you borrow plus any other fees or charges. Because APR is more inclusive, it is generally higher than the loan’s interest rate. When it comes to comparing different loan costs, APR can be a more helpful measure than interest rates alone, thanks to its inclusivity.

For many types of loans, federal law requires the lender to provide you with an APR. If you need to calculate the rate on your own, an online tool can help.

How it works

APR is expressed as a percentage of the loan amount. To see how it works, let’s look at an example. Say you are considering two different installment loans with the following features:

Both loans have the same amount and repayment term. If you focus only on interest rate, Loan B might seem like the better choice: Borrowing at a 29.5% interest rate would be more favorable than a 30.0% interest rate. The APR, however, tells a different story: When you consider total fees and other charges, Loan A ends up looking more attractive. 

Payday loan APR
Payday loans typically have short terms (generally less than 30 days) and are quoted based on fixed fees—not interest rates—but you can still calculate their APR. In fact, if you’re weighing the decision of taking out a payday loan versus a personal loan, it can be beneficial to use APR to make an apples-to-apples comparison of the costs.

Here’s a sample calculation of the APR for a typical payday loan:

Credit card APR

APR is also an important consideration if you borrow money on a credit card. You’ll often be subject to several different types of APRs, including:

• Purchase APR. The standard cost for carrying a balance. Note that many credit cards have a variable APR, which means your rate can go up or down, often according to an index such as the federal Prime Rate.
• Balance transfer APR. The cost to pay off the balances on other credit cards by transferring them to another credit card.
• Cash advance APR. The cost to use your credit card to withdraw cash from an ATM or bank.
• Penalty APR. The rate imposed when you fall significantly behind on your payments.

To learn more about other key financial concepts—like managing credit inquiries and understanding debt consolidation—stay tuned to our blog. You can also check out our free, interactive tools for budgeting, setting savings goals and tackling debt.