APR stands for Annual Percentage Rate. It is the yearly cost of borrowing money, expressed as a percentage, that includes both the interest rate and most fees associated with the loan. Federal law requires lenders to disclose APR on consumer loans so you can compare different offers on equal footing — because the interest rate alone does not capture the full cost of borrowing.
Interest rate vs. APR: the key difference
The interest rate is the base cost of borrowing the principal. APR adds the lender's fees — origination fees, points, broker fees, and certain other closing costs — to that interest cost, then annualizes the combined total. APR is always equal to or higher than the stated interest rate. On a mortgage, the spread between interest rate and APR reflects the fee load: a 7.0% rate with a 7.4% APR means fees are adding about 0.4% annually to the effective cost. A 7.0% rate with a 7.05% APR means very low fees.
Where APR is most useful — and least useful
APR is most useful when comparing fixed-rate loans of similar terms from different lenders. It is the standardized comparison tool that loan shopping requires. It is less useful for adjustable-rate mortgages (the disclosed APR assumes the rate never changes), for loans you plan to pay off early (fees get fully counted even if you will not use the full term), and for credit cards (where APR reflects the rate on a carried balance, but actual cost depends on your payment behavior).
APR on credit cards
Credit card APR is the annualized rate charged on balances not paid in full by the due date. If you pay your balance in full each month, your APR is irrelevant — you pay no interest. If you carry a balance, the APR determines the monthly interest charge (APR divided by 12, applied to the average daily balance). A 24% APR costs 2% per month on the balance carried — roughly $60/month on a $3,000 balance. Cards often have multiple APRs: a purchase APR, a balance transfer APR, and a cash advance APR (usually the highest, with no grace period).
APR vs. APY: opposite sides of the same coin
APR applies to borrowing. APY (Annual Percentage Yield) applies to saving and investing. When borrowing, lower APR is better. When saving, higher APY is better. The math structure is similar; the direction of the money flow is opposite.
Frequently asked questions
Why does my mortgage offer show two different rates?
Federal law requires lenders to disclose both the interest rate and the APR on mortgage offers. The interest rate determines your monthly payment. The APR — which includes origination fees, points, and certain other closing costs — gives you a better total-cost comparison tool. When shopping lenders, compare APRs, not just rates.
Is 0% APR really free money?
Promotional 0% APR offers mean no interest during the promotional period — but read the fine print. If you do not pay off the balance before the period ends, some offers charge retroactive interest on the full original balance. Others switch to the regular APR on the remaining balance. Know which type you are dealing with before relying on it.
Good places to double-check
Loan disclosures and credit card agreements should spell out the APR. When comparing offers, make sure you are looking at the same loan type, term, and fee structure.