Annual Percentage Rate (APR)

Key takeaways
* APR measures the annual cost of borrowing (or the annual return on some investments) expressed as a percentage and typically includes certain fees in addition to the nominal interest rate.
* APR uses simple interest and does not account for intra-year compounding; APY reflects compounding and will usually be higher.
* Different products and lenders treat fees differently, so APRs can be hard to compare unless you confirm which charges are included.
* For credit cards, mortgages and loans you should review whether APRs are fixed or variable, whether introductory rates apply, and how your credit score affects the rate offered.

What APR is

APR is the annualized rate that represents the cost of borrowing money, expressed as a percentage. Unlike a bare nominal interest rate, APR generally includes certain fees and finance charges so consumers can compare credit offers more easily. APR is based on simple interest and therefore does not reflect the effect of compounding within the year.

How APR works

• Lenders must disclose APRs so consumers can compare loan and credit products.
• APR is often advertised alongside (or instead of) monthly or periodic rates. For credit cards, different APRs can apply to purchases, cash advances, balance transfers and penalty situations.
• Loans can have fixed APRs (rate stays constant) or variable APRs (rate may change with an index).

APR calculation (basic)

A common method for calculating APR for a loan that includes fees is:

APR = (((Fees + Total Interest) / Principal) / n) × 365 × 100

where:
* Fees = included finance fees (as defined by the lender)
* Total Interest = total interest expected over the life of the loan
* Principal = loan amount
* n = number of days in the loan term

Another simple representation: multiply the periodic interest rate by the number of periods in a year (e.g., monthly rate × 12). Exact formulas and which fees are included can vary by lender and product.

APR vs. APY (and why it matters)

• APR (Annual Percentage Rate) = simple annualized rate, often includes some fees, excludes intra-year compounding.
• APY (Annual Percentage Yield) = effective annual rate that includes compounding. APY = (1 + periodic rate)^n − 1, where n is the number of compounding periods per year.

Example: If a card charges a daily periodic rate of 0.06273% (0.0006273), the APR is approximately 0.0006273 × 365 = 22.9%. The APY, accounting for daily compounding, is (1 + 0.0006273)^365 − 1 ≈ 25.7%. Carrying a balance all year means you effectively pay the APY, not the APR.

APR vs. nominal vs. daily periodic rate

• Nominal interest rate: the stated interest rate excluding fees and often excluding compounding effects.
• Daily periodic rate: the APR divided by 365 (or the stated periodic rate used to compute daily interest).
• APR is usually higher than the nominal rate when fees are included.

Types of APRs

• Credit card APRs: purchases, cash advances, balance transfers, penalty APRs, introductory (0% or low) APRs that revert after a set period.
• Loan APRs: fixed APRs (constant for the loan term) and variable APRs (can change based on an index).
• Mortgage APRs: may include closing costs, origination fees, and other charges—what’s included varies by lender.

Limitations and drawbacks

• APR does not account for compounding, so it can understate the effective cost for products that compound interest frequently.
• APR calculations can spread fees across long repayment terms, understating the annual impact for short-term loans.
• Lenders have discretion about which fees to include, which makes direct comparisons difficult sometimes.
• For adjustable-rate products, APR estimates assume a fixed rate and can understate future costs if rates rise after the initial period.

How to compare offers effectively

• Confirm which fees are included in the APR (origination, closing costs, points, application fees, etc.).
• For savings or investment products, compare APY rather than APR to account for compounding.
• Watch for introductory APRs and know when they end and what the ongoing rate will be.
• Consider your credit score: better credit typically leads to lower APRs.
• For loans with significant fees (e.g., mortgages), calculate total cost over the time you expect to hold the loan, not just the APR.

What is a “good” APR?

A “good” APR depends on market conditions, product type, and borrower creditworthiness. Shop around, compare APYs for deposit accounts, and verify whether advertised low APRs are introductory or conditional on having excellent credit.

Bottom line

APR gives a standardized snapshot of the annual cost of borrowing that includes certain fees, making it useful for comparing credit products. However, because APR excludes compounding and may omit some charges, it should be used alongside APY, a careful review of included fees, and a look at the loan or card’s full terms to understand the true cost.