Is it true that a 5.9% rate with $3,000 in fees can cost more than 6.2% with no fees?

A 5.9% rate with $3,000 in fees can cost more than 6.2% with no fees

Is it true that short-term loans exaggerate the impact of fees on APR?

Short-term loans exaggerate the impact of fees on APR

Is it true that always compare APR, not the advertised interest rate?

Always compare APR, not the advertised interest rate

1% APR gap = thousands

APR vs. interest rate: the number lenders hide

Why the interest rate on your loan isn't the real cost — and how to compare loans correctly.

Quick answer

Interest rate is the cost of borrowing the principal; APR includes the interest rate plus all loan fees, expressed as a yearly percentage. APR is always equal to or higher than the interest rate. Federal Truth in Lending Act requires lenders to disclose APR so borrowers can compare loans on equal footing — always compare by APR.

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Key takeaways

04 · ideas

APR includes fees that the interest rate ignores
A 5.9% rate with $3,000 in fees can cost more than 6.2% with no fees
Short-term loans exaggerate the impact of fees on APR
Always compare APR, not the advertised interest rate

Interest rate = the annual cost of borrowing the principal, expressed as a percentage.

APR (Annual Percentage Rate) = the interest rate plus all fees and costs, also annualized. APR is always ≥ the interest rate.

A lender advertising 5.5% but charging $3,000 in origination fees on a $200,000 loan has an APR closer to 5.8%. The interest rate is not the price — the APR is.

Simple rule: When comparing loans, always use APR. Ignore advertised rates.

The exception: if you'll pay off the loan very early, APR overstates the fee impact (fees are spread over the full term, but if you refi in 3 years, the "annualized" calculation misleads). In that case, calculate total cost instead.