What APR means
The annual percentage rate (APR) is the cost of a loan expressed as one yearly rate, including most fees as well as interest. Two loans can share the same interest rate but cost very different amounts because one charges a $500 fee and the other charges $5,000. APR puts them on the same scale.
US lenders must show the APR on loan disclosures under the Truth in Lending Act and Regulation Z. The CFPB describes it as a broader measure of the cost of borrowing than the interest rate alone. This calculator works it out the same way, so you can check a quote, compare offers, or see how much points and fees really add.
How APR is calculated
APR is not the interest rate plus the fees divided by something simple. It answers one question: at what rate are your payments worth exactly the money you actually got?
Find i such that: amount financed = payment × (1 − (1 + i)^−n) ÷ i
APR = i × 12 (for monthly payments)
- Fees paid upfront or deducted from the loan reduce the amount financed. The payment stays the same, but you received less, so the APR rises.
- Fees added to the loan raise the balance and the payment, while the money you received stays the same. Again the APR rises.
- Discount points are prepaid interest: 1 point = 1% of the loan. They lower the interest rate, but because you pay them upfront, they count in the APR.
There is no algebraic formula for i, so it is found by trial and error until the two sides match. That is the actuarial method in Appendix J of Regulation Z, and it is what this calculator does in your browser.
Worked example 1: a mortgage with points and fees
You borrow $200,000 at 6.5% for 30 years. You pay $3,000 of lender fees and 1 discount point ($2,000) at closing.
- Monthly payment on $200,000 at 6.5%: $1,264.14
- Amount financed: $200,000 − $3,000 − $2,000 = $195,000
- APR: the rate at which 360 payments of $1,264.14 are worth $195,000 = 6.745%
- Finance charge (all interest and fees): $255,088.98 + $5,000 = $260,088.98
The $5,000 of fees add about a quarter of a percentage point to the yearly cost.
Worked example 2: should you buy the point?
The lender offers two options: 6.5% with no point, or 6.25% with 1 point ($2,000). Both have $3,000 of other fees.
| 6.5%, no point | 6.25%, 1 point | |
|---|---|---|
| Monthly payment | $1,264.14 | $1,231.43 |
| Paid at closing | $3,000 | $5,000 |
| APR (kept 30 years) | 6.646% | 6.491% |
| Effective rate if repaid after 3 years | 7.065% | 7.195% |
| … after 5 years | 6.865% | 6.860% |
| … after 7 years | 6.781% | 6.718% |
| … after 10 years | 6.719% | 6.615% |
The point saves $32.71 a month, so it takes about five years to earn back its $2,000 cost. If you are likely to sell or refinance sooner, the cheaper-upfront loan wins even though its APR is higher. APR assumes you keep the loan for the full term, which most homeowners do not. Use More options above to enter how long you expect to keep the loan.
Worked example 3: a personal loan fee, deducted vs added
A $10,000 personal loan at 10% for 3 years with a $500 fee:
| Fee handling | Payment | Amount financed | APR |
|---|---|---|---|
| Deducted from the loan (you receive $9,500) | $322.67 | $9,500 | 13.562% |
| Added to the balance (you owe $10,500) | $338.81 | $10,000 | 13.387% |
| No fee | $322.67 | $10,000 | 10.000% |
A $500 fee on a short loan adds more than three and a half points to the APR. The personal loan calculator is built around this kind of origination fee.
Which fees count in the APR?
Regulation Z defines a finance charge as a cost you pay as a condition of getting credit. For mortgages, the rules are detailed; this table is a general guide.
| Usually included in APR | Usually not included |
|---|---|
| Interest | Appraisal fee (mortgage) |
| Origination and underwriting fees | Credit report fee (mortgage) |
| Discount points | Title insurance and title exam (mortgage) |
| Mortgage broker fees | Government recording fees and taxes |
| Prepaid interest | Home inspection |
| Mortgage insurance premiums | Late fees and other charges you can avoid |
Because some closing costs are excluded, a mortgage APR does not capture every dollar you pay at closing. The Loan Estimate shows both the APR and the full closing costs; compare both.
APR vs effective annual rate (APY)
APR is a simple annual figure: a 0.5% monthly rate is a 6% APR. It does not include compounding. The effective annual rate does:
| APR | Effective annual rate (monthly compounding) |
|---|---|
| 5% | 5.116% |
| 6.745% | 6.958% |
| 10% | 10.471% |
| 12% | 12.683% |
| 20% | 21.939% |
| 30% | 34.489% |
Savings accounts are usually quoted as APY, loans as APR, which makes loans look a little cheaper next to savings than they really are.
Tips
- Compare APRs on loans of the same amount and term. APR is most useful side by side. A 15-year and a 30-year mortgage with the same fees will show different APRs simply because the fees are spread over different periods.
- Ask for the fee list. If a quote shows a much higher APR than the rate, ask which fees caused the gap and whether any can be waived.
- Think about how long you will keep the loan. Upfront fees and points pay off only if you keep the loan long enough. Check the table under the results.
- Check the lender’s math. Regulation Z generally treats a disclosed APR as accurate if it is within 1/8 of a percentage point (1/4 for irregular loans). A bigger gap is worth asking about.
Common mistakes
- Comparing one lender’s interest rate with another’s APR. Always compare APR with APR.
- Assuming a lower APR means a lower payment. A loan with points can have a lower APR and a lower payment, but a much higher cash cost at closing.
- Adding the fee percentage to the rate. A 2% fee does not make a 6% loan 8%. On a 30-year loan it adds far less; on a 1-year loan it adds more.
- Forgetting excluded costs. Appraisal and title fees are real costs even though they are outside the mortgage APR.
Related calculators
To see a full mortgage payment with taxes and insurance, use the mortgage calculator. If you are weighing a new rate against your current loan, the refinance calculator shows the break-even month. For car financing, the auto loan calculator handles tax, fees and trade-ins.