What Is APR?

Understanding annual percentage rates


If you’ve ever applied for a car loan, a mortgage or a credit card, you’ve probably seen the term annual percentage rate (APR). But what is APR? And how can APR impact your monthly payment?

APR represents the price you pay to borrow money. It’s the percentage of the principal that you’re charged to pay off your loan plus any additional lender fees.

Understanding APR can help you make more informed credit decisions. It gives you a good idea of how much you’ll pay to borrow money. If you’re deciding between credit cards, APR is one factor you can compare to help determine which credit card is best for you.

What’s the Difference Between APR and Interest Rate?

It’s important to know interest rates and APRs are not the same. And the terms have different meanings when it comes to loans.

When a bank offers a loan or credit card, there will usually be two types of rates—interest rate and APR. The interest rate is the percentage charged on the principal loan amount.

The APR is a broader measure, because it includes the interest rate plus other costs, such as lender fees, closing costs and insurance. If there are no lender fees, the APR and interest rate may be the same—typically the case for credit cards.

How Does APR Work?

Many credit card companies offer a grace period for new purchases. If you pay off your balance on time each month, you won’t be charged any interest. If, however, you carry a balance from month to month, you'll be charged, based on the APR, for the unpaid portion.

What’s the Difference Between Fixed APR and Variable APR?

There are different types of APRs. And different rates can depend on the type of transaction. Understanding the differences—and knowing when rates change—can help you choose the card that’s best for you and your spending habits. Most of the time, you’ll have either a fixed APR or a variable APR.

Fixed-rate APR

A fixed APR generally doesn’t change over the life of your loan. This may make budgeting easier, because the rate’s more predictable.

Variable APR

Variable APRs are tied to an index interest rate, such as the prime rate. If the prime rate increases, so does your variable APR. So while it may have a low APR at first, it can increase over time. This can make it more difficult for you to plan your monthly budget.

Other APR Types and Transactions

APR can also be different depending on the type of credit you’re applying for. A credit card’s APR is usually higher than that of a car loan or a home loan. How you use your credit card can affect your rate. And in most cases, these rates aren’t advertised. Look for these additional APRs:

Cash advance APR

The cost of borrowing cash from your credit card tends to be higher. There may be different APRs for checks or for cash advances. And these transactions usually don’t have a grace period.

Penalty APR

If you violate the terms of your card’s contract—things like missing a payment or being late for a payment—the APR on your card may increase.

Introductory APR

A new credit card may come with a lower, limited-time APR. It can apply to specific transactions like a balance transfer or a cash advance.

Where Can You Find Your Account’s APR?

Your current APR can be found on your monthly credit card statement. In many cases, you can find your current APR—and determine whether it’s based on the prime rate—by looking at the section about interest charge calculation.

How Is Your APR Calculated?

Banks use a formula to determine how much interest you pay on your outstanding balance. It can be calculated daily or monthly, depending on the card.

Remember that some accounts have multiple APRs—refer to your credit card statement for more details on what you’re paying.

Make an Informed Decision

APR is just one factor to consider when choosing your next credit card. But knowing what it is and understanding how it impacts your payments can help you make an informed decision.

If you’re thinking about applying for a new credit card, keep these things in mind:

  • APR and interest rate are two different things.
  • Fixed APRs generally do not change over the life of your loan.
  • Variable APRs can fluctuate based on external factors like a change in the prime rate.
  • How you plan to use your card can affect rates—there may be additional APRs.

We hope that you found this helpful. Our content is not intended to provide legal, investment, or financial advice or to indicate the Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.