APR

APR (Annual Percentage Rate) is the yearly interest rate on a loan, expressed as a percentage. In US consumer finance, the APR is required by Regulation Z (the Truth in Lending Act, 1968) to include certain mandatory fees on top of the stated interest rate — origination fees, discount points, and mortgage insurance, but not closing costs paid to third parties.

APR is distinct from APY (Annual Percentage Yield), which accounts for compounding. A 6% APR compounded monthly is roughly 6.17% APY. APR is the convention for loans (where the borrower wants to understate the effective rate); APY is the convention for savings (where the bank wants to overstate it).

Mortgage shopping in the US: lenders are required to quote APR alongside the nominal rate. The APR difference reveals the fee load. A 6.5% nominal / 7.0% APR loan has substantial upfront fees; a 6.5% nominal / 6.55% APR loan has minimal fees. Compare APRs, not nominal rates.

Use our mortgage calculator with the APR rather than the nominal rate if you want a true monthly-payment estimate including fees.

Worked example

You’re comparing two $400,000 30-year mortgage offers. Lender A: 6.50% nominal rate, $8,000 in points and origination fees, APR 6.69%. Lender B: 6.75% nominal, no fees, APR 6.76%. Lender A’s monthly payment is $2,528; Lender B’s is $2,594 — a $66/month difference. But Lender A’s $8,000 of upfront fees, divided by the $66 monthly saving, breaks even at month 121 — exactly 10 years. If you sell or refinance before year 10, Lender B wins despite the higher headline rate. The APR difference (6.69 vs 6.76) is the closed-form summary of this: it’s the constant rate that, applied to a fee-free loan, would produce the same actual cash flow as Lender A’s “rate + fees” structure over the full term.

Note that APR is an annual figure even though it’s applied daily on most credit-card products. The daily rate is APR ÷ 365, applied to the average daily balance, then summed into the monthly interest charge. This means a 21.99% APR card with a $2,000 carried balance accrues roughly $1.20 of interest per day — about $36 per month — and the cardholder paying only the minimum will see the balance grow despite making payments.

When and why it matters

APR matters whenever you’re comparing loans with different fee structures — mortgages, auto loans, personal loans, credit cards. Comparing nominal rates alone systematically favours the offer with hidden fees; comparing APRs makes the cost difference visible in a single number. APR also matters for any consumer who carries a credit-card balance: the difference between a 18% APR card and a 24% APR card on a $5,000 carried balance is roughly $300/year in interest, which most cardholders are unaware they’re paying. The biggest practical mistake is comparing a US mortgage’s APR to a European mortgage’s TAEG/AER — they’re computed with different fee inclusions and aren’t directly comparable. Reference: CFPB — Interest rate vs APR.

Credit-card APR mechanics: US credit cards quote a single purchase APR but apply it as a daily periodic rate — the annual rate divided by 365 — and compound daily on any balance carried past the grace period. A 24% APR card with a $1,000 carried balance accrues roughly $0.66 of interest per day, which compounds to about $271 over a year (not the $240 a non-compounding 24% reading would suggest). Cash-advance APRs are typically 3-5 percentage points higher than purchase APRs and have no grace period — interest starts the day the cash is withdrawn.

0% APR offers — the fine print:retailer promotional financing often offers “0% APR for 12 months” with a deferred-interest structure. The catch: if any balance remains at the end of the promotional period, the full accrued interest from day one is added retroactively at the standard APR (often 25-30%). Paying off 99% of the balance and missing the deadline by one day can trigger thousands of dollars in retroactive interest. CFPB regulates this with clearer disclosure requirements (Reg Z amendments) but the structure itself remains legal. Always confirm whether a 0% offer is “deferred interest” or “true 0%”. Reference: CFPB — Fixed vs variable APR.