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Annual percentage rate (APR) is the yearly cost of interest plus fees on loan. Although APR and interest rate are often used interchangeably, they’re not the same thing. Because APR includes fees as well as interest, it gives you a better idea of a loan’s actual cost — APR is the true cost of borrowing.

In this post:

Fees included in APR

You’ll likely come across APR during several points of your life, such as when you buy a car or shop for a home. The fees included in APR are dependent on the type of credit you’re looking at:

  • Personal loans: APR for personal loans will include interest rates and origination fees.
  • Credit cards: Credit cards don’t have upfront fees, only an interest rate.
  • Mortgages: Fees like loan processing fees, underwriting fees, document preparation fees, private mortgage insurance, and escrow/settlement fees are generally included within the APR for a home loan.

If you’re not sure what’s included, ask the lender to specify the fees within the APR.

Types of APR

When it comes to APR, it’s important to know that there are two core types:

  1. Fixed-rate APR: A fixed rate APR means that the rate will stay the same for the duration of your loan. In the case of a 30-year mortgage, for example, you’ll have one set rate and one fixed monthly payment.
  2. Variable-rate APR: A variable-rate APR works differently. While a variable rate APR often starts out lower than a fixed-rate APR, it can fluctuate over time in response to market changes. Your APR could increase, which would also cause your monthly payment to go up, too.

Learn more: Fixed vs. Variable Rate Loans

Credit card APR

For credit cards, which don’t have upfront fees, the terms interest rate and APR can be used interchangeably. Credit cards typically include several different APR listings. Below are some of the common credit card APRs you’ll see:

  • Purchase APR: The purchase APR is the rate you’ll pay on new purchases.
  • Introductory APR: Some credit cards offer an introductory APR for a set time period. For example, you may get 0% APR for 12 months, giving you time to finance a purchase without worrying about interest fees.
  • Balance transfer APR: The balance transfer APR is the rate you’ll pay when you transfer the balance from one credit card to another.
  • Cash advance APR: If you take out a cash advance, you’ll typically pay a higher APR.
  • Penalty APR: If you miss a payment, the credit card company may charge you a penalty APR, a higher rate for new purchases.

APR’s impact on loan cost

The APR you receive is dependent on a number of factors, such as your credit score, income, the amount you intend to borrow, and the repayment term you select. In general, the better your credit and shorter the repayment term, the lower your APR.

However, APR can vary from lender to lender. The APR you’re offered can vary by whole percentage points.

While one lender may offer you a loan at 10% APR, another could offer you a loan at just 8% APR. That may not sound like a huge difference, but it can have a big impact on how much you pay in interest over the life of your loan.

Example: Let’s say you took out a $10,000 personal loan with a five-year repayment term and an APR of 10%. Your monthly payment would be $212, and over the course of five years, you’d repay a total of $12,748.

But let’s say you shopped around and qualified for a loan at just 8% APR with another lender. If you still had a five-year repayment term, your monthly payment would be $203, and you’d repay a total of just $12,166. The lower APR would help you save nearly $600.

 10% APR8% APR
Loan amount$10,000$10,000
Repayment term5 years5 years
Monthly payment$212$203
Total interest repaid$2,748$2,166
Total amount repaid$12,748$12,166

Check Out: The Best Personal Loans

The bottom line

When shopping for a personal loan or a new credit card, make sure to pay special attention to the APR. It’s the best indicator of the total cost, helping you understand how much you’ll have to pay in interest and fees over the course of a year.

Before submitting your application for a new line of credit, make sure you compare offers from multiple personal loan lenders to ensure you get the lowest rates.

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