Learn how your APR, or annual percentage rate, is calculated to get a new loan or line of credit.
APR, or annual percentage rate, encompasses the full yearly expense of loans or credit lines, combining interest and additional charges. Whether it’s credit cards, personal loans, and/or a mortgage, your APR includes all costs over a year.
An APR, or annual percentage rate, is the total annual cost you pay to take out a loan or line of credit. If you have credit cards, personal loans, and/or a mortgage—your APR is the total interest owed over the course of a year, plus any other lender charges, such as points and fees.
The way APRs are calculated varies based on the type of account. If your credit card purchase APR is 24%, that means you’re paying 2% in monthly interest charges for standard purchases—but, you’ll likely pay a higher APR for special transactions, such as cash advances.
For loans, the APR is the sum of your interest rate plus any fees charged by your lender, such as loan origination fees and closing costs.
Since banks and lenders are required to disclose their APRs, consumers can easily make apples-to-apples comparisons of similar financial products from different lenders—so be sure you review the APR details carefully before you sign on the dotted line.
While both are measures of interest, APR and APY are different. APR reflects the total cost of borrowing, including fees. APY reflects the interest earned on savings, accounting for compound interest.
In essence, APR pertains to borrowing costs on financial tools like mortgages, while APY relates to savings earnings on tools like high-yield savings accounts (HYSAs). Learn more about APRs and the difference between APR and APY.
Knowing what an APR is, and how it impacts you financially could empower you to make smart financial choices. This helps you navigate the borrowing process with clarity and confidence.
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