APR vs. interest rate: What’s the difference?

Whenever you’re shopping for credit, the annual percentage rate (APR) and the interest rate are likely to play an important role in your decision. But what’s the difference when it comes to the APR versus the interest rate?

Both terms represent the cost of borrowing money. But they aren’t exactly the same thing. The primary difference between APR and interest rate is that the APR reflects the interest rate plus additional costs that may apply to your loan. In that sense, APR may better reflect the true cost to borrow money.

Read on to learn more about the differences between APR and the interest rate.

Key takeaways 

  • An interest rate is the cost of borrowing money. It’s usually shown as a percentage.
  • An APR is a broader measure of borrowing costs. It can include the interest rate plus other fees. 
  • For credit cards, the APR and interest rate are typically the same amount. An APR on a mortgage or other home loan might reflect costs like origination fees and mortgage discount points
  • Lenders might determine APR, interest rates and other lending terms based on creditworthiness. 
  • The Truth in Lending Act (TILA) requires lenders to clearly disclose a loan’s APR and interest rate. That can help borrowers understand the cost of a loan.

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What is APR?

If you have ever taken out a loan or applied for a credit card, you’ve likely noticed the APR. As the Consumer Financial Protection Bureau (CFPB) explains, “APR is a broader measure of the cost of borrowing money.” 

In addition to the interest rate, the APR can include origination fees, which are associated with processing a new loan application. APR could also include transaction fees, broker fees, closing costs and other charges. The fees can vary depending on the lender, the loan and the borrower’s credit history. 

Keep in mind that the interest rate and the APR may be the same for a credit card. But that may not be the case with all loans.

What is an interest rate?

An interest rate represents the cost of borrowing money from a lender, according to the CFPB. An interest rate is expressed as a percentage and shows only the amount of money it costs to borrow the principal loan amount. For a credit card, that loan amount would be the card balance.

What’s the difference between APR and interest rate?

There are a few things to keep in mind when you compare APR versus the interest rate:

  • Interest rates only apply to the principal loan amount and don’t include additional fees. This is why the APR is typically higher than the interest rate. 
  • If the APR is the same amount as the interest rate, this could mean the lender isn’t charging additional fees.
  • A lender could advertise a low interest rate, but the loan may have a high APR. That’s why it’s important to review both rates when you’re comparing loan options. 
  • Some loans and credit cards may come with introductory offers, like 0% interest or APR. Once the promotional period ends, the interest rate or APR might increase.  
  • Comparing APRs and loan terms can help you estimate monthly payments and find the best option for your financial situation.

How are APRs and interest rates determined?

How APRs and interest rates are determined depends on the type of credit or loan.

When it comes to credit cards, your issuer may decide which interest rate or APR to charge you based on information in your application and your credit history, according to the CFPB. Generally, the higher your credit scores, the lower your interest rate or APR might be.

That’s true when it comes to loans too. But lenders might take even more factors into account, including things like the down payment and loan term. For example, the higher the down payment, the lower the interest rate or APR might be.

Variable vs. fixed rates

APRs or interest rates can either be variable or fixed. A variable rate is based on an index—like the prime rate—that lenders use to set their own interest rates. And a variable rate could change when the prime rate changes—among other reasons.

A fixed rate typically stays the same, but it can change under certain circumstances. For example, your fixed rate could increase if you make late payments or miss payments. But it depends on your lender’s policies and your card or loan terms.

How are APRs and interest rates calculated?

Lenders use their own formulas to determine interest rates. Some lenders may use the simple interest method, while others could use an amortization schedule. Lenders may also factor in your credit scores, the loan amount and loan type to determine your interest rate and APR

For credit cards, the interest can be calculated daily or monthly, depending on the card. “Many issuers calculate the interest you owe daily, based on the average daily balance,” the CFPB explains.

If that’s the case with your card, your issuer might track your balance day by day, adding charges and subtracting payments as they’re made. All those daily balances are added together at the end of the billing cycle. Then the total is divided by the number of days in the billing cycle to calculate your average daily balance.

Keep in mind that credit card issuers may charge one rate for purchases and different rates for other types of transactions, like balance transfers and cash advances.

An APR calculation may depend on the type of credit or loan. Mortgage APRs, for example, include discount points, fees and other charges in their calculations. 

Lenders and credit card issuers must disclose both interest rate and APR on any loans or credit to comply with TILA. The full explanation of how your issuer calculates interest will be disclosed in your card’s terms and conditions. 

Should you look at the interest rates or APRs to compare credit card offers?

When you’re comparing credit offers, whether you should look at the interest rates or the APRs depends on the type of credit or loan you’re applying for.

For credit cards, the interest rate and APR can be used interchangeably when comparing offers. Most credit cards have variable interest rates, which means the rate could change based on an index rate.

And keep this from the CFPB in mind: “On most cards, you can avoid paying interest on purchases if you pay your balance in full each month by the due date.”

When it comes to mortgages and other types of loans, comparing APRs may be the most helpful, since APRs include not only the interest but other costs too. And subtracting a mortgage’s interest rate from the APR can give you an idea of how much a lender’s fees will cost you. 

When comparing loan offers, it also helps to compare other factors beyond interest rates or APRs, such as annual fees, required down payments and loan terms.

APR vs. interest rate in a nutshell

The APR and the interest rate both represent the cost of borrowing money. And they’re both expressed as a percentage. For credit cards, the interest rate and the APR are usually the same. But when it comes to other forms of borrowing, like personal loans and mortgages, the APR can more accurately reflect the total cost of the loan. 

If you’re interested in a credit card with a low introductory APR, compare low interest and 0% APR credit cards from Capital One to find the card that’s best for you. View important rates and disclosures.

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