What Is APR?

APR (annual percentage rate) is the all‑in, annualized cost of a loan. It includes the interest rate plus certain fees (origination, points, etc.). The interest rate only reflects the cost of borrowing the principal. Lenders must disclose APR so you can compare offers. In the U.S., the Truth in Lending Act governs what goes into APR.

What’s In and Out of APR

APRs usually include administration or application fees, origination or discount points, mortgage insurance, and some closing costs. They often exclude appraisal, survey, title insurance, prepaid escrow (taxes, insurance), and similar items. Lenders can differ, so ask exactly which charges are in the APR.

Limitations of APR

APR assumes you keep the loan for the full term. If you refinance or sell early, upfront fees are effectively spread over fewer years, so your true cost is higher. When two loans have the same APR, the one with lower upfront fees is usually better if you expect to pay off early.

APR vs. APY

APY (annual percentage yield) applies to deposits and reflects compounded interest over one year. APR applies to loans and is usually a nominal rate. At the same number, APY is higher than APR because of compounding. Lenders often show APR on loans and APY on savings.

Frequently Asked Questions

What is APR and how is it different from the interest rate?

APR is the full annualized cost of the loan, including interest and certain fees. The interest rate is only the cost of the principal. APR is typically higher when fees are present and is used to compare offers.

What fees are included in APR?

Commonly included: origination, points, application or processing fees, mortgage insurance. Often excluded: appraisal, title, survey, prepaid escrow. Lenders must disclose what is in the APR.

Why does APR understate costs if I pay off the loan early?

Upfront fees are spread over the full term in the APR. If you pay off early, you pay those fees over fewer years, so the effective cost is higher. Lower upfront fees are usually better if you may refinance or sell soon.

What is the difference between APR and APY?

APR is for loans and includes fees; it is typically nominal. APY is for deposits and reflects compounded interest. At the same rate, APY is higher than APR because of compounding.