APR vs Interest Rate: What's the Difference?

Interest rate

The interest rate is the annual cost of borrowing applied to the outstanding balance. It's what the lender uses to calculate your payment. A $20,000 loan at 7% for five years has a monthly payment of about $396.02, regardless of fees.

APR

APR treats certain upfront charges — such as origination fees, discount points and some closing costs — as part of the cost of borrowing. It answers the question: if those fees were expressed as interest, what yearly rate would you be paying? Which fees are included is set by lending rules and varies by loan type.

APR = the annual rate r that makes:
Amount received = Payment × [1 − (1 + r/12)^−N] ÷ (r/12)

Why APR is usually higher

Fees reduce what you effectively receive while your payments stay the same. Paying the same amount for less money means a higher effective rate. If a loan has no fees, its APR and interest rate are essentially the same.

Comparing loans

APR is most useful when comparing loans with the same amount and term. It's less reliable when terms differ, or when you expect to repay or refinance early — in that case upfront fees are spread over fewer payments and the effective cost is higher than the APR suggests.

Credit card APR

Credit cards usually don't have upfront loan fees, so their APR is effectively the interest rate on balances you carry. Cards can have several APRs — purchase, balance transfer and cash advance — and introductory rates that expire. If you pay the full balance each month, you typically pay no interest at all. The Credit Card Payoff Calculator shows how APR affects payoff time.

Don't treat them as the same number

• Use the interest rate to estimate your monthly payment.
• Use the APR to compare total borrowing cost across similar offers.
• Check the loan estimate or disclosure for exactly which fees are included.
• Variable-rate loans can change after closing, so today's APR is not a permanent figure.

How the APR Calculator works

1. Enter the loan amount, interest rate and term.
2. Add the upfront fees you want to include.
3. Press Calculate to see the monthly payment, total cost and estimated APR.

The result is an estimate; lenders follow specific disclosure rules about which charges count. To see payments without fees, use the Loan Calculator, Personal Loan Calculator or Mortgage Calculator.