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What Is APR? Your Guide to Annual Percentage Rates

July 2, 2021

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APR is short for “annual percentage rate,” which is the total yearly cost of borrowing money expressed as a percentage of the loan principal. APR includes not only interest but certain other costs and fees associated with the loan. All things equal, the lower the APR, the better. So always be on the lookout for the lowest APR. And the lowest price on pizza. Dollar slices are such a steal.

What we’ll cover:

In a nutshell, APR is the total yearly cost of borrowing money
Different than the interest rate, APR includes the interest plus other fees
Understanding APR can help you compare the cost of loans or credit cards
Credit card APRs can start around 13-15%, while APRs for personal loans average between 10% and 28%
The APR formula is (principal amount + fees) x annual interest rate) / original loan amount

We’re guessing if you’ve been thinking about applying for a loan or credit card, you’ve probably heard a term called “APR" right?

If so, you might be wondering what exactly "APR" is and why it matters.

You’ve come to the right place to learn more - below we'll dig into what APR is, different types of APR, how APR is calculated and more.

What does APR mean?

APR stands for Annual Percentage Rate, which is the total yearly cost of borrowing money expressed as a percentage of the loan amount. In simpler terms, APR is the price of borrowing money.

This annual rate includes the interest and other additional costs or fees associated with the loan. APR can be used as a number to help compare the total cost of one loan to another.

Here’s a little background:

The calculation and disclosure of APR has been governed by the Truth in Lending Act (TILA) since it was passed in 1968. TILA mandated that consumer lenders clearly provide the annual percentage rates on loans. Before the passage of this law, some lenders were vague about costs associated with borrowing from them.

TILA was designed to protect consumers and make it easier for borrowers to compare costs and loans fairly.

How does APR work?

Now that we’ve covered what APR means and some of the background, let’s talk a little about how the APR actually works.

Whether we’re talking a mortgage, auto loan, or a credit card, lenders generally offer some kind of grace period for you to pay off new purchases without accruing any interest charges. So, if you always pay your bill in full and on time, APR might not be very relevant to you.

However, if you do carry a balance, the APR works by applying interest to your balance until its paid off. And those charges can add up quickly.

Particularly if we’re talking credit card interest – some credit cards can have high APRs. According to U.S. News in April 2021, the average credit card APR can be as low as 13% or as high as 26% and more.

APR vs. interest rate?

How is APR different from interest rate? Excellent question – the two are often confused.

The interest rate is the amount a lender (a bank, for example) charges a borrower (you, for example) in return for lending money to that borrower. Interest rates are expressed as a percentage of the principal (e.g., 15%), usually in annual terms.

On the other hand, APR is the interest rate plus certain additional costs and fees that a lender may charge, resulting in the total annual cost of a loan. As a result, a loan’s APR may be higher than the interest rate, and it’s more comprehensive of the total cost you’ll be paying.

When you apply for a loan, it’s important to consider the APR and not just the interest rate.

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As it relates to personal loans, the main difference between an interest rate and APR is that APR is made up of your interest rate, plus the applicable costs and fees related to the loan that the lender may charge. It makes sense, then, that the APR is typically higher than the interest rate. This is why it's important to look at both when you're shopping for loans. The APR is a more accurate representation of the loan's total costs, in terms of what you'll actually be paying, than the interest rate. Think of interest rates like the subtotal at a restaurant, and the APR as the total cost after you add tax and tip.

What is a good APR?

There are a lot of opinions about what makes a good APR. For example, some people might find it worth paying a higher APR if they’re receiving credit card rewards or points. But if we use the Federal Reserve as a benchmark, since early 2018, the average interest rate has been about 14% to 15% APR.

Credit card APRs can vary depending on the issuer and type of card.

In most instances, your credit card APR is also largely affected by your creditworthiness and the prime interest rate, which is determined by the Federal Reserve.

Although the Fed’s prime interest rate is out of your control, having a better credit score can increase your chances of getting a lower APR (yet another reason to regularly monitor your credit reports).

Turning again to data from U.S. News, personal loan APRs in 2020 typically ranged from 4% to 36%, with an average of 12%. Similar to credit cards, having a better credit score could help you get a better rate.

If you can, pay off your credit card balance in full each month so you’re not affected by the Purchase APR and won’t pay extra money on interest.

Different types of APRs and where you’d find them

Unsecured vs. secured credit

Different types of credit also have different average APRs. Auto loans and home loans generally have lower APRs because they are secured. Unsecured credit cards and unsecured loans will generally have higher rates because they present greater risk for the lender.

Fixed vs. variable rates

Some APRs can be variable, meaning the APR can change throughout the life of your loan or credit card. Alternatively, other APRs can be “fixed” meaning they may stay the same or will generally only be changed with advanced notice.

Different credit card APRs

Credit cards can have introductory APRs, purchase APRs, cash advance APRs and balance transfer APRs.

The specifics of your APR will always be laid out in the credit card’s terms and agreements.

If you can, pay off your credit card balance in full each month so you’re not affected by the purchase APR and won’t pay extra money on interest.

How to calculate APR

To calculate a loan APR, you’ll need to first calculate the monthly payment. To do this, you’ll need the loan’s principal amount, annual interest rate and any fees. We recommend calculating all of this in Excel using the PMT and RATE functions.

Here’s a real life example:

Let’s say you get a $50,000 personal loan with a fixed 10% interest rate for five years. This loan also has a $300 origination fee.

How to calculate monthly payment (PMT)

The Excel formula is =PMT(interest rate/number of months, loan term in months, loan amount including fees, final value).
For this formula you’ll need to convert your interest rate to decimal form. Usually, your interest rate will be expressed as an annual interest rate so the “number of months” would be 12. Convert the term of your loan from years to months. The “final value” of the loan will be zero because it will be paid off at the end.

How to calculate monthly payment (PMT)

The Excel formula is =PMT(interest rate/number of months, loan term in months, loan amount including fees, final value).
For this formula you’ll need to convert your interest rate to decimal form. Usually, your interest rate will be expressed as an annual interest rate so the “number of months” would be 12. Convert the term of your loan from years to months. The “final value” of the loan will be zero because it will be paid off at the end.

Here is what the monthly payment would be in our example:

=PMT(.1/12,60,50000,0)
The result is $-1062.35 – meaning your monthly payment would be $1,062.35

How to calculate APR (RATE)

Once you have the monthly payment, you can calculate APR.
The Excel formula is =RATE(loan term in months, monthly payment amount, loan amount minus fees, final value)*12.
For this formula you’ll need to subtract any fees from the loan amount. You’ll also have to multiply the rate by 12 to get the actual annual percentage rate.

How to calculate APR (RATE)

Once you have the monthly payment, you can calculate APR.
The Excel formula is =RATE(loan term in months, monthly payment amount, loan amount minus fees, final value)*12.
For this formula you’ll need to subtract any fees from the loan amount. You’ll also have to multiply the rate by 12 to get the actual annual percentage rate.

Here is what the monthly payment would be in our example:

=RATE(60,-1062.35,49700,0)*12
The result is 10.26%

If calculating APR triggers awful flashbacks to high school algebra, don’t worry. It’s highly unlikely you’ll ever need to calculate APR because lenders disclose this when you apply for a loan or credit card.

What is factored into an APR calculation for a personal loan?

APR is the annual cost charged by a lender for borrowing money, expressed as a percentage of the loan amount. Costs may include interest, fees or other expenses associated with the loan.

APR is calculated as the sum of the applicable fees, expenses and interest over the life of the loan expressed as a percentage of the loan amount. The APR will be higher than the interest rate if fees or other costs are charged for the loan.

If there are no additional costs or fees, the APR should be equal to the interest rate.

The interest rate of a fixed APR loan won’t change during the term of the loan—though in some cases it could change if you default.

The interest rate of a variable APR loan, however, is typically based on an underlying benchmark interest rate that may go up or down. Given that, a variable APR loan can change as the underlying interest rate changes. Find out whether your APR is fixed or variable so you know if the rate will stay the same over the life of your loan.

Good to know: All other things being equal, when you are comparing loans, the loan that has the lowest APR is usually the least expensive option.

Why is APR important?

APR, as opposed to interest rate, helps you evaluate the true cost of your loan or credit card, since an interest rate may not reflect other fees and costs associated with the loan.

Don’t hesitate to ask your lender what costs and fees are included in your APR.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.