Why is APR higher than the interest rate?

APR includes fees and closing costs spread over the loan term, making it higher than the base interest rate. It shows the true annual cost of borrowing.

Should I compare loans by APR or interest rate?

APR is better for comparison because it includes all costs. A loan with a lower rate but higher fees may actually cost more than a loan with a slightly higher rate and lower fees.

APR Calculator

Calculate the true Annual Percentage Rate of a loan including fees and closing costs. Compare loans fairly by their APR, not just the interest rate. Free and private.

What Is APR and How Is It Calculated

APR (Annual Percentage Rate) represents the true yearly cost of borrowing money, expressed as a percentage. Unlike the nominal interest rate, APR includes all mandatory fees, origination charges, discount points, and closing costs spread across the loan term. Lenders are required by the Truth in Lending Act (TILA) to disclose APR so borrowers can compare offers on equal footing. This calculator determines APR by finding the interest rate that would produce the same monthly payment on the effective loan amount (loan minus fees) as the nominal rate produces on the full loan amount. The result is always higher than the stated interest rate when fees are involved.

APR Calculation Method

Effective Loan = Loan Amount − Total Fees

APR = Rate where payment on full loan at nominal rate equals payment on effective loan

Solved iteratively using binary search for precision to three decimal places.

APR vs Interest Rate

The interest rate is simply the cost of borrowing the principal, without accounting for additional charges. APR wraps in all mandatory costs: origination fees, discount points, mortgage insurance, and closing costs. Two mortgage offers might both show 6.5% interest, but one charges $3,000 in fees while the other charges $8,000. Their APRs will differ significantly, revealing which loan is truly cheaper over time. For short-term loans, fees have a larger impact on APR because they are spread over fewer payments. For a 30-year mortgage, the APR and interest rate are usually close. For a 5-year auto loan with high origination fees, the gap can be substantial. Always compare APR, not just the advertised interest rate.

How to Get a Lower APR

Your credit score is the single biggest factor in the APR you receive. Borrowers with scores above 740 typically qualify for the lowest rates, while scores below 670 face significantly higher costs. Before applying for a loan, check your credit report for errors and pay down revolving balances to reduce your utilization ratio. Shop multiple lenders and get at least three quotes — APR can vary by a full percentage point between lenders for the same borrower. Negotiate fees directly, as origination charges and discount points are often adjustable. Consider a balance transfer card with a 0% introductory APR for existing credit card debt. For mortgages, buying discount points (prepaid interest) lowers your rate, but only makes financial sense if you plan to keep the loan long enough to recoup the upfront cost.