APR stands for annual percentage rate. It's meant to represent the total yearly cost of borrowing, expressed as a percentage — combining the interest rate with certain fees, like an origination fee, so you can compare offers on a more even footing.
APR vs. interest rate
The interest rate reflects only the cost of borrowing the principal. The APR folds in additional costs required to get the loan, giving a fuller picture of what you'll actually pay. Two loans with the same interest rate can have different APRs if their fees differ — which is exactly why APR, not the interest rate alone, is the more useful number for comparing offers.
Why a short loan term can push APR higher
APR is annualized — calculated as if the cost applied over a full year. A flat fee on a loan due in two weeks, when annualized, can produce a much higher percentage than the same dollar fee on a loan repaid over two years, even though the actual dollar cost of the short loan might be smaller. This is a common source of confusion, and it's worth understanding rather than being alarmed by the percentage alone — look at both the APR and the total dollar cost.
How to use APR when comparing offers
- Compare the APR, not just the advertised interest rate, across every offer you're considering.
- Multiply the APR's implied cost by the actual loan term to sanity-check the total dollar amount you'd repay.
- Ask whether the APR is fixed for the full term or could change.
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