Two numbers, two different jobs
Every loan offer shows an interest rate and an APR. The interest rate is what the lender charges on your balance, and it sets your monthly payment. The APR, or annual percentage rate, rolls certain upfront fees into the same yearly figure so you can see the fuller cost of borrowing.
If a loan has no fees that count toward APR, the two numbers match. Every dollar of points or lender fees pushes the APR above the rate.
Why APR comes out higher
Take a $250,000 mortgage at 6.25% for 30 years. Your payment is $1,539.29 no matter what. Now add one point ($2,500) and $1,000 of lender fees, taken out of the loan. You owe payments on $250,000 but only received $246,500.
Paying $1,539.29 a month for $246,500 is the same as borrowing at 6.384%. That's the APR. The 0.134-point gap is the fees, translated into a rate.
Small loans and short terms magnify fees
The same fee moves APR more when the loan is smaller or shorter. A $500 fee on a $30,000 car loan at 7% adds about 0.71 points to the APR over 60 months, giving 7.71%. Over 24 months the same fee pushes the APR to 8.67%, because you're paying it off over fewer months.
That's why a flat fee that looks harmless on a mortgage can matter a lot on a short personal or auto loan. Always read the APR next to the rate, and ask which fees went into it.
How to check an APR yourself
You need four things: the loan amount, the fees taken out or paid upfront, the monthly payment and the number of payments. Subtract the fees from the loan amount to get the amount financed. Then find the monthly rate at which your payments are worth exactly that amount today, and multiply it by 12.
Spreadsheets do the search for you. In Excel, =RATE(60,-594.04,29500)*12 gives about 7.71% for the car loan above. If your result is far from the lender's APR, the usual cause is a fee that one of you counted and the other didn't.
When the lower APR isn't the cheaper loan
APR spreads the fees over the full term. If you sell or refinance early, you've paid all the fees but only some of the interest savings. Compare two $250,000 offers:
- Offer A has the lower APR and wins if you keep the loan five years or more.
- Offer B wins if you move or refinance within about two years, because you skipped the point.
- The crossover sits somewhere between those checkpoints. Your plans decide which loan is cheaper.
Which one to compare
Use APR to compare offers for the same amount, term and loan type. It's the fairest single number for that. Use the interest rate when you want to know your payment, and look at the dollar figures when you know roughly how long you'll keep the loan.
For mortgages, the CFPB suggests comparing Loan Estimates side by side, including the five-year cost line. To test your own offers, our APR calculator shows the APR, payment and your cost at any checkpoint.
Mistakes people make
- Comparing one lender's APR with another's interest rate.
- Comparing APRs on loans with different terms. A 15-year and a 30-year loan aren't on the same scale.
- Assuming every closing cost is in the APR. Title and appraisal fees on a mortgage usually aren't, so check cash to close too.
- Forgetting about the holding period. APR assumes you keep the loan for the full term.
Frequently asked questions
Which is more important, APR or interest rate?
For comparing offers of the same size and term, APR. For knowing your monthly payment, the interest rate. If you'll keep the loan only a few years, check the dollar cost by that point too.
Is APR the same as the interest rate when there are no fees?
Yes, for a simple fixed loan. With no points or other finance charges, the money you receive equals the loan amount, so APR and the rate match. The default mortgage at 6.25% with no fees shows 6.25%.
Do points lower APR?
Points lower your interest rate, but they're also counted in APR. Whether APR goes down depends on how much rate cut you buy for each point.
Do appraisal and title fees count toward a mortgage APR?
Usually not. Regulation Z excludes reasonable title, appraisal, survey, notary and credit-report fees on real estate loans from the finance charge. Points and loan fees are included.
References
These sources support the method or guidance used for APR Calculator. Verify time-sensitive rules at the source.
Try the calculator
Open APR Calculator, enter your scenario, and compare its supporting rows with this guide's method and checks.