What Is APR and Why Does It Matter?

When you shop for a loan, you'll see two numbers that look similar but mean different things: the interest rate and the APR. Most lenders lead with the interest rate — but APR is the number that actually tells you what the loan will cost you.

What APR stands for

APR stands for Annual Percentage Rate. It represents the total yearly cost of borrowing money, expressed as a percentage. Unlike the basic interest rate, APR includes not just the interest but also most of the fees the lender charges to give you the loan.

Interest rate vs APR

Here's the key difference:

• Interest rate — the base cost of borrowing the principal amount, expressed annually
• APR — the interest rate plus origination fees, closing costs, and other lender charges, rolled into a single annual percentage

A loan with a 6.5% interest rate and $2,000 in origination fees might have an APR of 7.2%. The APR gives you the true cost.

What fees are included in APR?

For personal loans and auto loans, APR typically includes:

• Origination fees
• Processing fees
• Underwriting fees

For mortgages, APR also includes:

• Points paid to lower your rate
• Mortgage broker fees
• Most closing costs

What APR doesn't include

APR doesn't include everything. It typically excludes:

• Property taxes and homeowner's insurance (for mortgages)
• Late payment fees
• Prepayment penalties
• Optional add-ons like credit insurance

Why lenders advertise the interest rate instead

The interest rate is always lower than the APR, so lenders often lead with it because it looks more attractive. This is why it's important to always ask for the APR and use that number when comparing loan offers side by side.

The bottom line

APR is the single most useful number for comparing loans from different lenders. It accounts for both the interest and the fees, giving you a true apples-to-apples comparison. When in doubt, always ask: what's the APR?