Is it true that a 6.5% rate with $3,000 in fees can produce a 6.9% APR?

A 6.5% rate with $3,000 in fees can produce a 6.9% APR

Is it true that aPR standardizes loan comparisons across lenders?

APR standardizes loan comparisons across lenders

Is it true that for short-term loans, fees create very high APRs?

For short-term loans, fees create very high APRs

Real cost of credit

APR vs. interest rate: what each number means

The interest rate determines your payment. APR includes all the fees. Here is how to read both numbers.

Quick answer

APR (Annual Percentage Rate) is the total cost of credit per year, including the interest rate plus all required fees, expressed as a percentage. APR is always equal to or greater than the interest rate. Federal Truth in Lending Act requires APR disclosure precisely so borrowers can compare loans on the same footing. Always compare loans by APR, never by interest rate alone.

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Key takeaways

04 · ideas

APR always equals or exceeds the stated interest rate
A 6.5% rate with $3,000 in fees can produce a 6.9% APR
APR standardizes loan comparisons across lenders
For short-term loans, fees create very high APRs

Two numbers appear on almost every loan offer: the interest rate and the APR (Annual Percentage Rate). They measure related but different things.

Interest rate: The percentage the lender charges annually on the outstanding balance. This determines your monthly payment.

APR: The interest rate plus most fees and costs, expressed as a single annualized percentage. It reflects the broader cost of borrowing.

Because APR includes origination fees, points, and certain closing costs, it provides a standardized way to compare loans even when fee structures differ across lenders. APR is always greater than or equal to the stated interest rate. If they are equal, the loan has no fees.