HOW IT WORKS
APR (Annual Percentage Rate) shows the true yearly cost of borrowing, including fees. While interest rate only shows interest cost, APR includes origination fees, points, and other charges. Use APR to compare loan offers from different lenders fairly.
INTEREST RATE VS APR
Interest Rate: The cost of borrowing the principal. A $250,000 loan at 6.5% means you pay 6.5% interest on the balance annually. Does NOT include fees.
APR: The total annual cost including fees, spread over the loan term. A 6.5% rate with $5,000 in fees becomes ~6.67% APR. Always higher than or equal to the interest rate.
Why it matters: Lender A offers 6.5% rate with $5,000 fees. Lender B offers 6.75% rate with $1,000 fees. Which is better? Compare APRs: Lender A = 6.67% APR, Lender B = 6.78% APR. Lender A is actually cheaper.
WHAT'S INCLUDED IN APR
Origination fees: Lender's fee for processing the loan. Typically 0.5-1% of loan amount. On a $250,000 loan, that's $1,250-$2,500.
Discount points: Prepaid interest to lower your rate. 1 point = 1% of loan amount. Pay $2,500 upfront to reduce rate by ~0.25%. Included in APR.
Mortgage insurance: Required if down payment < 20%. Usually 0.5-1% of loan annually. Included in mortgage APR.
NOT included: Title insurance, appraisal fees, home inspection, attorney fees. These are closing costs but not part of APR calculation.
APR BY LOAN TYPE
Mortgages (2024): 30-year fixed: 6.5-7.5% APR. 15-year fixed: 5.75-6.75% APR. ARM (adjustable): 5.5-6.5% initial APR (can change).
Auto loans: New car: 5-8% APR. Used car: 7-12% APR. Excellent credit can get 0% APR promotions from dealers.
Personal loans: Good credit: 8-15% APR. Average credit: 15-25% APR. Bad credit: 25-36% APR.
Credit cards: 20-30% APR on balances. 0% intro APR offers exist for 12-21 months. Cash advances: 25%+ APR.
Student loans: Federal: 5-8% fixed. Private: 4-14% depending on credit and cosigner.
HOW FEES AFFECT APR
Higher fees = Higher APR. On a $250,000, 30-year loan at 6.5%:
$0 fees = 6.50% APR (rate equals APR)
$2,500 fees = 6.58% APR (+0.08%)
$5,000 fees = 6.67% APR (+0.17%)
$10,000 fees = 6.84% APR (+0.34%)
Shorter loans are more affected. Same $5,000 fees on a 15-year loan adds more to APR because fees are spread over fewer years.
WHEN APR MATTERS MOST
Comparing lenders: Always compare APR, not just interest rate. Lower rate with high fees may cost more than higher rate with low fees.
Long-term loans: For 30-year mortgages, even 0.1% APR difference = thousands of dollars. $250,000 at 6.5% vs 6.6% APR = $6,000 difference over 30 years.
When APR matters less: If you plan to refinance or sell within a few years, focus on total upfront costs rather than APR. High fees may not be worth it if you won't keep the loan long enough.