APR Calculator

What is APR?

The Annual Percentage Rate (APR) shows the full yearly cost of borrowing money. It includes both the interest you pay and any extra fees tied to the loan. This gives a clearer picture of what a loan will truly cost you compared to looking at the interest rate alone.

Many borrowers confuse APR with the interest rate. The interest rate only covers the cost of borrowing the principal, while the APR adds in other charges too.

Simply comparing interest rates can be misleading. Since APR includes additional costs, it offers a better way to see which loan offer is truly the best.

Why APR Matters

In the United States, the Truth in Lending Act requires lenders to show the APR clearly. This makes it easier for borrowers to compare different loans. However, since fees vary between lenders, it’s smart to ask for a detailed list of what’s included in the APR.

For mortgage loans, typical fees included in APR calculations may be:

• Administrative fees

• Application fees

• Mortgage insurance premiums

• Mortgage broker fees

• Certain closing costs

• Escrow fees

• Origination and discount points

• Processing fees

• Refinance and underwriting fees

Fees often not included in the APR:

• Appraisal fees

• Survey fees

• Title insurance and title fees

• Builder warranties

• Prepaid escrow items like property taxes or homeowners insurance

• Intangible taxes

Limitations of APR

While APR is a helpful tool for comparing loans, it assumes the borrower will keep the loan for its full term. If you plan to pay off the loan early, the APR may underestimate your actual costs.

For example, upfront fees spread across 30 years look small. But if you pay off the mortgage in just 10 years, those upfront costs will have a bigger impact. In the U.S., many homeowners sell or refinance before 30 years, making lower upfront costs more attractive, even if the APR is similar.

Types of APRs

Fixed APR Loans

With a fixed APR, your rate stays the same for the entire loan term. Fixed APRs are great if you lock them in when market interest rates are low. However, fixed rates can initially be higher than variable rates.

Variable APR Loans

Variable APRs can change over time, usually tied to an index like the Federal Funds Rate. If market rates rise or fall, your loan’s rate will likely adjust too.

Lenders also add a credit-based margin to variable APRs, depending on your credit score. Borrowers with better credit scores can secure lower rates.

Variable APR loans can make sense if you expect market rates to drop, potentially saving you money over time. However, the longer the loan term, the bigger the risk of rate increases.

APR vs. APY: What’s the Difference?

Another important term is APY (Annual Percentage Yield), which mainly applies to savings accounts and shows the total interest earned in a year, including compounding.

While APR reflects simple interest (without compounding), APY factors in how often interest compounds. Because of this, APY usually looks higher than APR when rates are positive.

Financial institutions often advertise APRs for loans (to make borrowing seem cheaper) and APYs for savings (to make saving seem more profitable).

Example:

• A $100 loan at 10% APR, compounded monthly, results in about $10.47 of interest in a year.

• A $100 savings account offering a 10.47% APY would also earn $10.47 in a year.

Even though they appear different, 10% APR equals 10.47% APY with monthly compounding.

To easily convert between APR and APY, or compare different compounding intervals, feel free to use our Compound Interest Calculator.