When shopping for a mortgage, car loan, or credit card, you'll see two numbers: the interest rate and the APR (Annual Percentage Rate). They look similar but measure different things. Confusing them can lead to bad borrowing decisions.
What Is the Interest Rate?
The interest rate is the base cost of borrowing money, expressed as a percentage of the principal per year. A $200,000 mortgage at a 6% interest rate means you'll pay 6% of your loan balance in interest annually. It does not include fees, points, or other loan costs.
What Is APR?
APR is the Annual Percentage Rate — it includes the interest rate plus most fees associated with the loan (origination fees, mortgage broker fees, discount points, and other charges). APR represents the true cost of borrowing expressed as a yearly rate. It's always equal to or higher than the interest rate.
Why APR Is More Useful for Comparison
- Lender A: 6.0% interest rate, $4,000 fees → 6.4% APR
- Lender B: 6.1% interest rate, $500 fees → 6.15% APR
- Despite the lower interest rate, Lender A is the more expensive option
- Comparing APRs levels the playing field across different fee structures
When APR Is Less Useful
APR assumes you keep the loan for its full term. If you'll refinance or sell your home in 5 years, a loan with higher upfront fees (and lower rate) has a higher effective cost than the APR suggests, because you're paying those fees without enjoying the rate benefit for the full period.
APR on Credit Cards
Credit card APR is the annual rate used to calculate interest on carried balances. If your APR is 20% and you carry a $1,000 balance, you'll pay roughly $200 in interest per year. Many cards charge different APRs for purchases, cash advances, and balance transfers — always read the fine print.
For mortgages, compare APRs from multiple lenders. For short-term loans or credit cards you'll pay off monthly, the nominal interest rate matters less than avoiding fees entirely.
