Annual Percentage Rate (APR)
The yearly cost of a loan expressed as a percentage, including interest and fees.
What is APR?
The Annual Percentage Rate (APR) is the annual cost of a loan or credit expressed as a single percentage, designed to give borrowers a standardized way to compare loan products. Unlike a simple interest rate, APR includes not only the base interest rate but also certain fees charged by the lender—such as origination fees, discount points, and mortgage broker fees—spread over the life of the loan. In the United States, lenders are required by the Truth in Lending Act (TILA) to disclose APR on consumer loans including mortgages, credit cards, and auto loans. A lower APR indicates a less expensive loan. APR does not account for compounding; the Annual Percentage Yield (APY) or effective annual rate (EAR) captures the true compounded cost of borrowing and is a more precise measure when interest compounds more than once per year.
Example
A 30-year fixed mortgage with a 6.5% interest rate and $3,000 in lender origination fees on a $300,000 loan has an APR of approximately 6.62%. The higher APR reflects the annualized impact of those upfront fees spread over the loan's full term, giving the borrower a more complete picture of total borrowing cost than the interest rate alone.