So, what is APR, exactly? APR stands for annual percentage rate, which is a percentage rate calculation that attempts to reflect the true annual cost of borrowing by taking into account the interest rate on a loan and any finance charges and/or closing costs incurred for the loan.
The terms for loans or credit agreements can vary widely in the way interest rates, transaction fees, finance charges, late penalties and other factors are charged, so APR attempts provides a standardized “bottom line” percentage rate that can be used to compare loan offers from different lenders.
How APR Works
The Annual Percentage Rate on a loan, whether it’s a credit card balance, mortgage, or auto loan, takes into account the interest that accrues on the loan as well as any additional finance charges.
Some loans or credit agreements, such as many credit cards, come with no additional finance charges other than the accrued interest on the loan. Other loans, such as mortgages, do often come with additional costs other than just the accrued interest, such title insurance, appraisal, escrow, settlement, origination, points, and other fees.
Because fees and interest rates can vary widely from lender to lender for the same type of loan or credit agreement, APR provides a standardized way to “boil down” the total cost of borrowing. including the interest rate and any additional finance charges and fees, into one simple percentage rate that can be used to more easily compare loan offers.
Though APR can be a useful tool for shopping for credit or a loan, it’s not without its faults. If you want to get the best deal, it’s important to understand how APR works and what its limitations are.
Learn more about how credit card APR works, how interest accrues for credit cards, and how you can calculate credit card interest.