Let’s say you’re comparing two offers for a mortgage. One has a 4.05% interest rate and $10,000 in closing costs. The other has a lower interest rate of 3.95% but $25,000 in extra fees. Which mortgage is the more affordable option?
When loans have different fee (or discount) structures, it’s hard to compare one with another. Plus, just looking at the interest rate doesn’t give you the full picture. Fortunately, APR lets you compare loans on an apples-to-apples basis.
So, what is APR, exactly? Read on for the full APR definition and discover how to choose the right loan or credit card based on APR.
What is APR?
APR, or annual percentage rate, refers to the amount of interest and fees you’ll pay on a loan or credit card balance over the course of a year.
APRs can look similar to interest rates since both are expressed as a percentage of the principal balance. They also refer to the amount you’ll pay over the year on your borrowed money. Plus, both APRs and interest rates can be fixed or variable.
APR vs. interest rate: Know the difference
But when it comes to comparing APR versus interest rate, APR is a more inclusive term.
APR includes extra fees (or discounts) along with interest. For instance, a personal loan might have an origination fee or a mortgage could come with closing costs. When it comes to the costs of borrowing, APR, rather than interest rate, shows you the whole picture.
Plus, all lenders must disclose APR on their loans and credit cards by law, according to the Truth in Lending Act of 1968. This act protects consumers by requiring lenders to disclose the true costs of borrowing.
Thanks to this law, you can compare loans and mortgages at a glance and get a clear picture of their long-term costs.
4 APR facts every borrower should know
1. How APR works with loans and mortgages
Loans and mortgages typically have a single APR, and it’s expressed as a percentage of the principal.
For example, let’s say you’re looking to take out a $200,000 mortgage. The interest rate on the mortgage is 4.50%, but the APR is 4.703% as a result of $4,800 in closing costs. With a 30-year mortgage, you’d end up paying $164,814 in interest and fees.
For comparison’s sake, let’s say another lender offers you the same mortgage with a 4.198% APR. After 30 years, you’d pay $143,739 in interest and fees. By lowering your APR just a few tenths of a percentage point, you’d save more than $21,000.
As you can see, this chance to compare offers (and APRs) helps you make the best choice for your budget. You’ll get a complete sense of the costs of borrowing.
2. Most credit cards have multiple APRs
Unlike loans and mortgages, credit cards often have different APRs for different transactions. You might have a different APR for purchases, balance transfers, and cash advances.
The Chase Freedom Unlimited credit card, for instance, starts with a promotional 0% purchase APR for the first 15 billing cycles. This APR then increases to somewhere between 15.99% and 24.74%. Its balance transfer APR has the same range, but its cash advance APR from day one is 25.99%.
Keep in mind: Credit cards have some of the highest APRs of any financial product. The national average as of July 2017 is 16.06%, according to CreditCards.com.
That being said, credit card APR might never come into play. If you pay your balance off in full every month, you’ll never pay interest or late fees. As a result, your credit APR can effectively be 0%.
If you never carry a balance on a credit card, you don’t have to worry too much about APR. But if you miss a bill, you can see how these high APRs can make paying off credit card debt difficult.
3. Your financial history affects your APR offers
When lenders advertise their products, they usually state a range of APRs. SoFi, for example, offers personal loans with APRs between 5.75% and 16.24%. And as you saw above, the Chase Freedom card has purchase APRs between 15.99% and 24.74%.
So what does APR mean when it’s expressed as a range? Well, part of your APR depends on an index, like the Prime Rate. Chase, for instance, bases its APR on the Prime Rate, which was 4.25% as of June 20, 2017. But then it adds 11.74% to 20.49%, depending on your creditworthiness.
When you apply for a credit card or loan, lenders look at your credit score and history of repayment. Lenders also assess your financial background before offering you an APR.
Ultimately, the stronger your credit, the lower your rate will be. If you have poor credit, you might end up with a high APR on a loan or credit card.
Every lender does things a little differently. If you’re looking to borrow money or take out a line of credit, it can be a good idea to shop around to find your best rate.
4. APR is different than APY
Along with APR, you might also have come across the term APY, or annual percentage yield. APY is commonly seen on savings account products. You might consider the APY on two savings accounts to determine which will grow your money faster.
On loan products, however, APY works a little differently. Where APR reflects interest and fees on an annual basis, APY takes compounding interest into account to give you a more accurate look at your total charges.
The more frequently interest compounds, the more you’ll end up paying in the long run. So, you’d pay more for a loan where interest compounds daily than for one that compounds monthly.
If you want to take a microscope to the charges behind a loan or credit card, consider the APY. Otherwise, you should be fine sticking with APR when you compare loan products.
APR helps consumers compare products
Now that you’re an expert in answering the question, “What is APR?” you can use this knowledge to compare loans, mortgages, and credit cards.
Instead of getting caught up in the weeds of different fee structures, you can rely on APR to compare multiple products. Just remember: By choosing the loan with the lowest APR, you’ll save the most money on fees and interest.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|