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

Annual percentage rate (APR) and interest rate both represent the cost of borrowing money. But APR reflects the interest rate plus additional costs that may apply to a loan. In that sense, APR may better reflect the true cost of borrowing money.

What you’ll learn: 

• An interest rate is the cost of borrowing money, usually shown as a percentage.

• APR is a broader measure of borrowing costs. It can include the interest rate and fees. 

• For credit cards, the APR and the interest rate are typically the same. 

• Lenders might use a person’s creditworthiness to help determine APRs, interest rates and other lending terms.

APRs and interest rates both measure the cost of borrowing money. But interest rates typically only reflect what it costs to borrow the principal loan amount. APRs represent the interest rate plus any applicable fees. This is why APR may offer a more comprehensive idea of what borrowing money will cost. 

APRs and interest rates can be variable or fixed. A variable rate is based on an index, such as the prime rate, that lenders use to set their interest rates. A fixed rate generally stays the same throughout the life of the loan. But a fixed rate may change under certain circumstances, like if you make a late payment.

If you’ve ever applied for a loan or credit card, you’ve likely noticed the APR. As the Consumer Financial Protection Bureau (CFPB) explains, “APR is the interest rate plus any additional fees charged by the lender.” 

In addition to the interest rate, the APR can include costs like:

• Origination fees 

• Transaction fees

• Broker fees

• Closing costs 

Fees can vary depending on the lender, the loan type and the borrower’s credit history. The interest rate and the APR are typically the same for a credit card. But that may not be the case with all loans.

To calculate APR, you’ll use a formula that compares the interest rate and fees to the amount you borrow and the number of days of the loan, according to the CFPB. 

The calculation might change depending on the loan type. Mortgage APRs, for example, may include things like discount points, fees and other charges. Using a reliable online APR calculator can help.

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.

“Many issuers calculate the interest you owe daily, based on the average daily balance,” the CFPB says. 

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.

Credit card issuers may also charge one rate for purchases and different rates for other types of transactions, like balance transfers or cash advances.

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 the 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.”

Card issuers might determine rates based on information in a borrower’s application and their credit history, according to the CFPB. Generally, the higher your credit scores, the lower your interest rate or APR might be. 

Some loans and credit cards may come with introductory offers, like 0% APR. Once the promotional period ends, the rate will typically increase.

When it comes to home loans and other types of loans, comparing APRs may be the most helpful. You may also want to consider things like annual fees, down payments and other terms. APRs include interest and other costs, including origination fees and mortgage discount points. Subtracting a mortgage’s interest rate from the APR can give you an idea of how much a lender’s fees will cost you. 

Lenders might also consider factors like the down payment and loan term to determine the interest rate. For example, the higher the down payment, the lower the interest rate or APR might be.

Here are answers to some common questions about the differences between interest rate and APR.

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 personal loans and mortgages, the APR can more accurately reflect the total cost of the loan. 

Looking for a low-interest credit card option that fits your spending habits and financial goals? You can check whether you’re pre-approved without harming your credit scores.