APR (Annual Percentage Rate)
APR vs interest rate
The interest rate is just the cost of the borrowed money itself. The APR includes the interest rate plus mandatory fees (origination, closing costs on some loans) annualized over the loan term. APR is almost always higher than the headline interest rate.
APR on credit cards
Credit cards quote APRs but typically have no upfront fees, so the APR usually equals the interest rate. The catch: credit-card APR is applied to any balance you carry past the grace period, and it compounds daily on most cards. A 24% APR is brutal — pay the balance in full each month and you pay nothing.
APR vs APY
APR is the cost of borrowing (does not assume compounding). APY (Annual Percentage Yield) is the return on savings (does assume compounding). When evaluating loans, look at APR. When evaluating savings accounts, look at APY.
Annual cost of carrying a $5,000 credit-card balance
Interest charged over one year on a $5,000 balance, minimum payments only. APR is the dominant variable; small differences compound fast.
| APR | Interest paid in year 1 | Balance after 1 year |
|---|---|---|
| 18% | $914 | $5,914 |
| 22% | $1,124 | $6,124 |
| 26% | $1,338 | $6,338 |
| 29.99% | $1,553 | $6,553 |
Related terms
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