What Is APR? 4 Key Facts Every Borrower Should Know

what is APR

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 5.29% and 14.24%. 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 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. 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 Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 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. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% 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 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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