APR vs. Interest Rate: What's the Difference?
Both are percentages, both describe the cost of a loan, and they are almost never the same number. Here is why.
The interest rate is the price a lender charges for the use of the principal, expressed as a yearly percentage. The annual percentage rate (APR) takes that interest rate and folds in certain required fees — origination charges, points, some closing costs — then re-expresses the whole thing as a single yearly rate. Because APR includes costs that the interest rate leaves out, APR is almost always higher.
A worked example
A lender offers $10,000 at an 8% interest rate over 3 years, with a $300 origination fee deducted from the proceeds. You still make payments as if you borrowed the full $10,000 — $313.36 a month — but only $9,700 actually reached your account.
| Value | |
|---|---|
| Interest rate | 8.00% |
| Origination fee | $300 |
| Monthly payment | $313.36 |
| Effective APR | ~10.08% |
The fee adds more than two percentage points to the real annual cost. Try your own numbers in the APR Calculator.
When the interest rate matters more
The interest rate drives your monthly payment and the way each payment splits between interest and principal (see how amortization works). If two loans have identical fees, the one with the lower interest rate is cheaper, full stop.
When APR matters more
APR is built for comparison shopping. If Loan A is 7.5% with no fee and Loan B is 6.9% with a $900 fee, the sticker rates point in opposite directions from the fees. APR resolves that into one number — as long as you compare APR to APR and both assume the same term.
What APR does not capture
- How long you keep the loan. APR assumes you hold it for the full term. Pay off a fee-heavy loan early and your effective cost is higher than the quoted APR.
- Third-party costs that the lender does not require or control (some appraisal or title services, for example).
- Rate resets on variable loans — the APR shown is based on today's rate.
- Penalties for late or early payment.
- Compounding differences on products that are not standard installment loans.
Where you will see each number
In the United States, the Truth in Lending Act requires lenders to disclose the APR before you sign, precisely so borrowers can compare offers. The interest rate appears on your note and drives the amortization schedule; the APR appears on the disclosure and is the better single figure for ranking competing offers. For total dollars rather than a percentage, the Loan Cost Calculator adds interest and fees into one number.