What is the difference between APR and interest rate?
Interest rate: the percentage of the loan charged as interest annually, not including fees. APR (Annual Percentage Rate): the all-in cost — interest rate plus required fees, expressed as a yearly rate. APR is always ≥ interest rate. The larger the fees relative to the loan, and the shorter the loan term, the bigger the gap between APR and rate. For a 30-year mortgage with modest fees, APR might be only 0.1–0.2% above the rate. For a personal loan with a 3% origination fee on a 3-year term, APR could be 1.5% above the rate.
How is APR calculated?
APR is the internal rate of return (IRR) of the loan's cash flows, annualized. Conceptually: you receive (loan amount minus upfront fees), then make equal monthly payments. APR is the annual rate at which the present value of all payments equals the net amount received. Mathematically it requires iterative solving — there's no closed-form formula. The federal definition is in Regulation Z (Truth in Lending Act), Appendix J, which specifies exactly which fees are included and the calculation method.
Why does APR matter more for shorter loans?
Fees are amortized over the loan term. A $3,000 origination fee on a 30-year mortgage costs ~$8/year per fee dollar. On a 3-year personal loan, the same $3,000 fee costs ~$83/year per fee dollar. The shorter the term, the more dramatically fees inflate the APR above the stated rate. This is why payday loans have 300–400% APR even though the flat fee sounds modest — the fee is spread over just 14 days.
Is a lower APR always better?
Yes, with one caveat: APR assumes you hold the loan to full term. If you'll pay off early (especially a mortgage), you should calculate the break-even point of fees. Example: Loan A has 7.0% APR with zero fees. Loan B has 6.74% APR but $6,000 in upfront costs. If you sell the house in 4 years, you might not recoup those fees. Our break-even calculation tells you exactly how many months until the lower APR loan saves more than its upfront cost.
Do credit cards have an APR separate from interest rate?
For credit cards, the APR and interest rate are the same — the card APR includes no additional fees. Annual fees, balance transfer fees, and cash advance fees are separate charges not included in the quoted APR. The credit card APR is a periodic rate (typically 1/12th monthly) applied to the daily average balance. Most credit cards have variable APRs tied to the Prime Rate plus a margin.