What is APR and How Does It Affect Your Wallet?

All about APR

Annual Percentage Rate (APR) tells you how much a loan costs. Lenders quote APR as a percentage of the total amount you borrow, and that number gives you a rough idea of how much you’ll pay per year to borrow. If your loan has an APR of 10%, you’ll pay roughly $10 annually for every $100 you borrow.

Most loans are more complicated than that, and your actual cost may depend on how quickly you pay off your debt, how lenders calculate interest charges, and other factors. That said, a lower APR is typically better. A quick way to compare offers is to evaluate each offer's APR.

APR vs. interest rate

APR may include multiple costs related to your loan, including interest charges and lender fees. As a result, APR can sometimes provide a more accurate view of borrowing costs than an interest rate because APR (ideally) includes everything. A low interest rate might look appealing, but it's critical to understand the fees you pay to qualify for that rate.

Not every loan includes its fees in the APR, however. You can find the details of what fees are included in the APR in the loan agreement. (Note that APRs are calculated differently depending on the product; always be sure to check the loan agreement and any Truth in Lending disclosures.)

APR and credit cards

Credit cards quote an APR when you open an account, but credit card rates are typically variable rates. If rates rise, your cost of borrowing increases. What’s more, making late payments can cause you to pay a penalty APR that’s even higher than the standard rate.

Fixed vs. variable rates

You can lock in a fixed interest rate or go with a variable rate that may change over time. That decision affects how much you spend on interest and how your lender calculates your required monthly payments (your payment is based, in part, on the interest rate).

There are pros and cons of each rate

Fixed rates are predictable. You know exactly how much you’ll need to pay each month, and you can calculate how much you’ll spend on interest. In return for that safety, your loan may have a slightly higher rate than the starting rates available on variable-rate loans.

Variable rates start with the lowest rates possible, and they move up or down in response to interest rate changes in the broad economy. While it’s possible for rates (and your payment) to decrease, the risk of higher rates is significant. If rates rise, you need to pay more each month, and you’ll end up spending more to service your debt.