What Is APR?

We’re guessing you’ve been thinking about applying for a loan, and you’ve heard about a term called “APR,” right?

And you’re wondering, just exactly what does APR mean?

You’ve come to the right place to learn 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.

This annual rate includes the amount of your interest and certain 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.

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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.

How is APR different from interest rate?

Excellent question—the two are often confused.

The interest rate is the percentage of the principal that a creditor charges the borrower for lending them money.

APR, however, combines interest rate with certain additional costs and fees that a lender may charge, resulting in the annual cost of a loan. As a result, a loan’s APR may be higher than the interest rate, and it’s more informative about 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 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 actual costs, in terms of what you'll actually be paying, than the interest rate. Think of interest rates as the subtotal at a restaurant, and the APR as the total cost after you add tax and tip.

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, and therefore the interest rate of 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.

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

Parting advice

APR, as opposed to interest rate, helps you evaluate the true cost of your loan, since an interest rate may not reflect the 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 Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.