APR vs interest rate: what's the difference?
Every loan quotes two numbers that look almost the same — the interest rate and the APR — and the gap between them is where a lot of money hides. Knowing which is which is the difference between comparing offers fairly and being fooled by a low headline rate.
The interest rate: the cost of the money
The interest rate is what the lender charges on the balance you borrow. It sets your monthly payment, but it says nothing about the fees you pay to get the loan.
The APR: the cost of the loan
The APR (Annual Percentage Rate) rolls the upfront fees — origination charges, points — into a single annual figure, so it reflects the true yearly cost. Because you receive less than the face amount (fees come out) but repay on the full amount, the APR is always higher than the interest rate whenever fees exist. A loan with no fees has an APR equal to its rate.
A $300,000 mortgage at a 6.5% rate with $6,000 in fees carries an effective APR of about 6.70% — that 0.20% gap is the fees, made comparable.
When APR can mislead you
APR assumes you keep the loan for its entire term. If you'll sell or refinance in a few years, a loan with low fees and a slightly higher rate can actually cost you less than a low-APR loan whose fees you never fully amortize. APR is the right comparison for a loan you'll hold to the end — not always for one you won't.
How to compare offers
Compare loans by APR, not headline rate, and weigh it against how long you'll actually keep the loan. Run the numbers in the APR Calculator (or the APR Advanced Calculator for multiple fees and points), and use the Loan Calculator to see the monthly payment each rate produces. Thinking about buying down your rate? The Discount Points Calculator finds the breakeven.
Frequently asked questions
Why is the APR higher than the interest rate?
Because it includes fees. If a loan has no fees, its APR equals its interest rate; every fee pushes the APR above the rate.
Which number should I compare?
APR, for an apples-to-apples cost comparison — but adjust for how long you'll keep the loan, since APR assumes you hold it the full term.
Does APR include every cost?
It includes finance charges like points and origination fees, but not always every third-party cost (appraisal, title). Always read the official loan estimate.