APR vs. Interest Rate: What Is the Difference?
Loan ads often lead with an interest rate. The number that tells you more is the APR. Here is what each one measures and how to use them when two offers look alike.
Key takeaways
- Interest rate: the cost you pay the lender for borrowing money, on top of the principal.
- APR: the interest rate plus additional fees charged by the lender, shown as a yearly rate.
- Always compare APR to APR. Comparing an APR with an interest rate is comparing two different things.
What the interest rate measures
An interest rate is the cost you pay to the lender for borrowing money, on top of the loan amount, which is called the principal. It is expressed as a percentage.
It does not include the fees a lender may charge to make the loan. Two lenders can quote the same interest rate and still charge you different amounts overall.
Sources: [1]
What the APR adds
The annual percentage rate is the interest rate plus additional fees charged by the lender. Federal Truth in Lending rules describe it as the cost of your credit as a yearly rate, and lenders must disclose it.
Because those fees are folded in, a loan that carries them will generally show an APR above its interest rate. When a loan has no such fees, the two numbers can be close.
How to compare two offers
- Put the APRs side by side, not one APR against one interest rate.
- Check that both offers are for the same amount and the same term, so the two APRs describe the same loan.
- Look at the total of payments on each disclosure to see the full amount you would pay back.
This article explains disclosed terms. It does not quote, predict or recommend any rate.
Frequently asked questions
Why is the APR higher than the interest rate?
Because the APR includes the interest rate plus additional fees charged by the lender. If a loan carries fees, they push the APR above the interest rate.
Do lenders have to show the APR?
Yes. For closed-end credit such as an installment loan, the annual percentage rate is one of the required Truth in Lending disclosures.
Related guides
Sources
- Consumer Financial Protection Bureau. What is the difference between a loan interest rate and the APR?
- Consumer Financial Protection Bureau — Regulation Z (Truth in Lending), 12 CFR 1026.18. § 1026.18 Content of disclosures (closed-end credit)