APR Calculator
The Annual Percentage Rate (APR) provides a more accurate picture of the cost of borrowing than the interest rate alone. Use this calculator to find the true cost of your loan, including fees and compounding.
Impact of Fees on APR
Example for a $100,000 loan at 5% interest for 30 years:
| Fees | Interest Rate | APR | Monthly Payment |
|---|---|---|---|
| $0 | 5.00% | 5.00% | $536.82 |
| $2,000 | 5.00% | 5.18% | $536.82 |
| $5,000 | 5.00% | 5.46% | $536.82 |
| $10,000 | 5.00% | 5.95% | $536.82 |
What is APR?
Annual Percentage Rate (APR) is the broader measure of the cost to you of borrowing money, expressed as a percentage rate to represent the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account.
While the interest rate determines your monthly payment, the APR helps you understand the total cost of the loan by factoring in upfront costs like origination fees, mortgage insurance, and points.
APR vs. Interest Rate
The main difference is that the interest rate is the specific percentage you pay on the principal amount of the loan. The APR is the interest rate plus other costs such as:
- Loan processing fees
- Origination fees
- Mortgage insurance
- Discount points
- Closing costs
Because it includes these extra costs, the APR is almost always higher than the interest rate.
Limitations of APR
- Loan Duration: APR assumes you will keep the loan for its entire term. If you pay off the loan early or refinance, the effective APR might be higher because the upfront fees are spread over a shorter period.
- Variable Rates: For adjustable-rate mortgages (ARMs), the APR doesn't reflect the maximum possible interest rate.
- Fee Inclusion: Not all lenders include the same fees in their APR calculations, making it important to ask for a breakdown.
How APR is Calculated
APR = [((Fees + Interest) / Principal) / n] × 365 × 100
(where n = number of days in the loan term)
Note: For most consumer loans, APR is calculated by finding the interest rate that makes the present value of all future payments equal to the loan amount minus fees.
Frequently Asked Questions
APR is higher because it includes the interest rate plus other mandatory fees required to get the loan. It represents the "true" cost of borrowing.
Generally, the lowest APR is better if you plan to keep the loan for the full term. If you plan to sell or refinance quickly, a lower interest rate with fewer upfront fees might be better.
No, APR is a simple interest calculation. The Annual Percentage Yield (APY) is the metric that includes the effect of compounding.
The concept is the same, but the specific fees included can vary between mortgages, car loans, and credit cards.
On a fixed-rate loan, the APR is set at the beginning. On a variable-rate loan, the APR will change as the underlying interest rate changes.