Annual Percentage Rate (APR)

Category: Debt

Definition

The Annual Percentage Rate (APR) is a broad measure of the cost of borrowing money. It reflects not just the interest rate but also other fees you may have to pay, such as mortgage insurance, closing costs, and loan origination fees. It is expressed as a yearly rate.

Example

You are looking at two loans. Loan A has a 5% interest rate but $2,000 in fees. Loan B has a 5.2% interest rate but only $500 in fees. Comparing their APRs, which include these fees, will give you a more accurate picture of which loan is truly cheaper.

Calculation / Formula

While the exact APR formula can be complex, it essentially amortizes the upfront fees over the loan term and adds that to the interest rate to give you a single percentage. Banks are required by law to show you the APR.