Understanding APR
APR (Annual Percentage Rate) represents the true cost of borrowing, including interest rate plus fees, expressed as yearly rate. A $10,000 loan at 12% interest with $500 fees costs $1,700 total, making effective APR 17%. APR allows comparing loans with different fees and terms - always compare APR, not just interest rate.
Lenders must disclose APR, but many advertise only interest rate. A 10% loan with $1,000 fees is more expensive than 12% loan with $100 fees. APR captures total cost. Credit cards, mortgages, auto loans, and personal loans all have APR - use it to comparison shop.
Lower APR saves money over loan term. Even 1% APR difference on a $20,000 5-year loan saves $500+ in total cost. Always ask for APR before borrowing, read fine print for fees (origination, processing, prepayment penalties), and compare multiple offers. Lowest advertised rate isn't always the best deal.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Interest rate is the cost to borrow principal. APR includes interest plus fees (origination, processing, insurance) expressed as annual rate. APR is always equal to or higher than interest rate.
Credit cards are unsecured debt (no collateral) with higher default risk, plus offering convenience and rewards costs money. Average credit card APR is 16-24%. Pay full balance monthly to avoid interest charges entirely.
Yes, but differently. Some loans charge prepayment penalties included in APR calculation. Others don't, making early payoff cheaper. Check loan terms - paying early saves interest if no prepayment penalty exists.