APR Calculator
Calculate the true Annual Percentage Rate (APR) of a loan by factoring in fees, points, and closing costs. Compare the advertised interest rate vs the actual cost of borrowing.
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Understanding APR vs Interest Rate
The interest rate is the cost of borrowing the principal loan amount, expressed as a percentage. The APR (Annual Percentage Rate) is the total cost of the loan including the interest rate plus fees, points, and other charges, expressed as a yearly rate. APR gives a more accurate picture of what you're actually paying.
Why APR Is Always Higher Than the Interest Rate
APR includes costs that the simple interest rate ignores: origination fees, discount points, mortgage broker fees, closing costs, and prepaid interest. Because these costs increase the effective price of borrowing without changing the monthly payment amount, the APR is always equal to or higher than the stated interest rate.
What Fees Are Included in APR?
Under the Truth in Lending Act (TILA), lenders must include origination fees, discount points, mortgage broker fees, and certain closing costs in the APR calculation. Items typically excluded are appraisal fees, title insurance, credit report fees, and home inspection costs, though rules vary.
How to Use APR When Comparing Loans
APR is the best tool for comparing loans from different lenders. A loan with a lower interest rate but higher fees might have a higher APR than a loan with a slightly higher rate and fewer fees. Always compare APRs for the same loan term to make an apples-to-apples comparison.
APR Limitations
APR assumes you keep the loan for its full term. If you refinance or sell before that, the upfront costs are amortized over fewer years, making the effective rate even higher. For short-term ownership, a loan with lower fees but a slightly higher rate may actually cost less.