If you’ve ever compared loan offers and wondered about the difference between an annual percentage rate (APR) and an interest rate, you’re not alone. The two numbers often appear side by side, which can make borrowing feel more confusing than it needs to be.
Here’s the simple answer: An interest rate is the percentage a lender charges to borrow money, while APR is a broader measure of borrowing costs that can include the interest rate plus certain fees and charges. For mortgages, for example, the Consumer Financial Protection Bureau (CFPB) explains that APR reflects the interest rate along with points, mortgage broker fees, and certain other charges.
That’s why APR and interest rate are closely related but not necessarily the same. For many loans, APR is higher because it includes costs beyond the interest rate.
The Difference Between APR and Interest Rate at a Glance
| Interest Rate | APR |
| The percentage charged to borrow money | A broader annualized measure of borrowing costs |
| Focuses on the rate charged on the loan balance | Can account for interest plus certain fees and charges |
| Often helps determine monthly principal-and-interest payments | Can help compare the cost of similar loan offers |
| May be lower than the APR | Is often equal to or higher than the interest rate for many closed-end loans |
Depending on the type of loan and applicable disclosure rules, APR may reflect costs such as:
- Origination fees
- Mortgage points
- Broker fees
- Certain other loan charges
Not every fee is included in APR, and how APR is calculated depends on the type of credit. The CFPB’s Regulation Z contains the federal disclosure rules that apply to consumer credit.
What Interest Rate Means
An interest rate is the percentage a lender charges you to borrow money.
For example, if you borrow $10,000 at a 7% interest rate, that rate helps determine how much interest accrues on the loan.
For installment loans such as personal loans, auto loans, and mortgages, the interest rate typically plays a major role in calculating principal-and-interest payments.
What It Usually Includes
The interest rate reflects the rate charged for borrowing the money itself.
It generally does not account for additional lender fees or other upfront charges that may be included in the APR.
Why Lenders Show It Separately
The interest rate and APR provide different information about a loan’s cost.
For example, you might see:
- Interest rate: 6.5%
- APR: 7.1%
The interest rate shows the borrowing rate, while the APR may provide a broader measure of the loan’s cost.
What APR Means
APR stands for annual percentage rate. For many closed-end loans, it reflects the interest rate along with certain finance charges associated with the loan. The CFPB explains the distinction in its guidance on loan interest rates and APR.
Depending on the loan, those costs may include charges such as:
- Origination fees
- Application, underwriting, or processing fees charged by the lender
- Discount points
- Mortgage broker fees
- Mortgage insurance premiums, including private mortgage insurance
- Required credit insurance premiums
Not every fee is included. What counts toward APR depends on the type of credit and the applicable disclosure rules. Costs that generally are not reflected in APR include:
- Appraisal and home-inspection fees
- Title fees and most other third-party closing costs
- Credit report fees
- Late fees and other penalty charges
- Notary and recording fees
For personal installment loans, for example, the CFPB recommends reviewing the lender’s loan disclosures to understand fees such as origination charges.
Why APR Is Often Higher Than the Interest Rate
For many loans, APR is higher than the interest rate because the APR calculation reflects certain additional borrowing costs.
For example, imagine two loans with the same loan amount, repayment term, and 8% interest rate. If one also has an origination fee that is included in its APR calculation, its disclosed APR may be higher.
That difference can make APR useful when comparing similar loans that have different fee structures.
Can APR Ever Be Lower Than the Interest Rate?
For many standard fixed-rate loans, APR is usually equal to or higher than the interest rate because APR may account for additional charges. The CFPB makes this point specifically when explaining mortgage APRs.
However, APR calculations can work differently depending on the type and terms of the credit. Adjustable-rate loans and open-end credit such as credit cards, for example, follow different APR rules. That’s why it’s better to compare the disclosures for the specific type of loan rather than assume APR works identically for every credit product.
APR vs. Interest Rate With a Simple Example
Consider two hypothetical personal loan offers with the same loan amount and repayment term:
Loan A
- Interest rate: 9%
- Origination fee: $0
- Disclosed APR: 9%
Loan B
- Interest rate: 9%
- Origination fee: $800
- Disclosed APR: 11%
Although both loans have the same interest rate, Loan B’s higher disclosed APR signals additional borrowing costs.
Now consider another hypothetical comparison:
Loan C
- Interest rate: 7%
- Disclosed APR: 10%
Loan D
- Interest rate: 8%
- Disclosed APR: 8%
At first glance, Loan C may appear less expensive because it has a lower interest rate. But its higher APR indicates that additional costs are affecting the overall cost comparison.
These examples are illustrative. A loan’s actual APR depends on factors such as the loan amount, repayment term, fees, and applicable APR calculation rules.
When to Look at APR vs. Interest Rate
APR can be useful when comparing the borrowing costs of similar loans with similar terms.
The interest rate helps you understand the rate being charged on the borrowed amount and, for many installment loans, how the rate affects principal-and-interest payments.
Looking at both numbers gives you more information than relying on either one by itself.
What Is Better, APR or Interest Rate?
Neither number is inherently “better.” They answer different questions.
If you’re comparing the borrowing costs of similar loans, APR can provide a broader basis for comparison.
If you want to understand the rate charged on the balance or how the rate affects a loan payment, the interest rate is important.
Is It Better to Have a Lower Interest Rate or Lower APR?
When comparing similar loans with the same terms, a lower APR generally indicates lower total borrowing costs.
But the interest rate still matters because it affects the interest charged on the loan balance and can affect monthly payments.
Other factors may also matter, including:
- Loan fees
- Monthly payment
- Repayment term
- Whether the rate can change
- How long you expect to keep the loan
Reviewing the full loan disclosures can give you a clearer picture than comparing a single number.
How This Works for Personal Loans, Mortgages, and Credit Cards
APR does not work exactly the same way for every type of credit.
Personal Loans
Personal loan APR and interest rate may differ when certain loan fees are included in the cost calculation.
For example, personal installment loans may carry origination fees, so it’s important to review the lender’s disclosures rather than look only at the advertised interest rate.
Mortgages
Mortgage APR can differ from the interest rate because it reflects certain additional borrowing costs. The CFPB explains that mortgage APR can include the interest rate, points, mortgage broker fees, and other charges paid to obtain the loan.
When comparing mortgages, compare similar loan types and terms. The CFPB also cautions that APR comparisons involving adjustable-rate mortgages require additional care because the APR does not represent the maximum possible interest rate on the loan.
Credit Cards
Credit card APR works differently from APR on many installment loans.
For credit cards, the interest rate is generally stated as a yearly rate called the APR. Fees such as annual fees, balance-transfer fees, or cash-advance fees may be disclosed separately rather than being folded into the advertised APR in the same way certain charges can affect APR on a closed-end loan. The CFPB explains these credit-card terms.
A credit card may also have more than one APR, including rates for:
- Purchases
- Balance transfers
- Cash advances
- Introductory offers
- Penalty pricing, when applicable
A Simple Step-by-Step for Comparing Loan Offers
- Compare the same type of loan.
- Compare similar repayment terms.
- Look at APR as one measure of borrowing cost.
- Review the interest rate separately.
- Check the fees and other charges.
- Compare monthly payments.
- Consider whether the rate is fixed or adjustable.
- Review how long you expect to keep the loan.
A lower APR can be useful when comparing similar offers, but it shouldn’t be the only factor you consider.
FAQs
What Is the Difference Between APR and Interest Rate?
The interest rate is the percentage charged for borrowing money. APR is a broader annualized measure that, for many loans, reflects the interest rate plus certain fees and finance charges.
Why Is My APR Much Higher Than My Interest Rate?
A larger difference between APR and interest rate can indicate that certain fees or other finance charges are affecting the APR calculation. The difference can also depend on the loan amount, repayment term, and type of credit.
Is APR the Same as the Interest Rate for Credit Cards?
For credit cards, the interest rate is generally expressed as an annual percentage rate, or APR. That differs from many closed-end loans, where APR may incorporate certain additional finance charges into a broader measure of borrowing cost.
Can Your APR Be Lower Than Your Interest Rate?
For many standard fixed-rate loans, APR is usually equal to or higher than the interest rate. But APR rules vary by credit product, so comparing the specific disclosures for the loan or account is more reliable than applying that rule universally.
The Bottom Line
Understanding the difference between APR and interest rate can make loan offers easier to compare.
The interest rate shows the rate charged for borrowing money, while APR can provide a broader measure of borrowing costs. How APR works depends partly on the type of credit, so compare similar products and review the full loan disclosures.
Looking at the interest rate, APR, fees, repayment term, and monthly payment together can give you a clearer picture of what a loan may cost.
