What Is APR? 4 Key Facts Every Borrower Should Know

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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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®, for instance, starts with a 0% Intro APR for 15 months on purchases and balance transfers, then a 16.74% - 25.49% Variable APR applies.

Keep in mind: Credit cards have some of the highest APRs of any financial product.

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.

The information related to Chase Freedom Unlimited® has been collected by Student Loan Hero and has not been reviewed or provided by the issuer of this card prior to publication. Terms apply.

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 5.74% and 18.07%. 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?

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.74% – 18.07%1 $5,000 to $100,000
5.67% – 35.99% $1,000 to $50,000
5.99% – 35.89%* $1,000 to $50,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
15.49% – 35.99% $2,000 to $25,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 18.07% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of October 10, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.05% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 5.99%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** 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.

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