What APR means
The annual percentage rate, or APR, puts the cost of a loan into one yearly number. According to the Consumer Financial Protection Bureau, a loan's interest rate is the cost you pay the lender for borrowing the money, while the APR measures the interest rate plus the additional fees charged with the loan, such as origination charges and other fees charged when the loan is made. For mortgages, the CFPB calls the APR a broader measure of the cost of borrowing than the interest rate, which can include points, broker fees and other charges.
Because fees are added on top, a loan with fees has an APR higher than its interest rate. Without fees the two are the same. That makes the APR useful for comparing offers with different rates and different fees, as long as you compare APR with APR.
How the APR is calculated
The federal rules for the APR on installment loans are in Regulation Z, appendix J. They use the actuarial method: the APR is the rate per payment period that makes the payments worth exactly the amount financed, multiplied by the number of periods in a year. For monthly payments that means the monthly rate times 12.
M is the monthly payment and n the number of payments. The amount financed is the money you actually get to use: the loan amount minus any fees taken upfront. If the fees are added to the loan, you get the full loan amount, but your payment is figured on the larger balance. No formula solves this equation for i directly, so the calculator narrows it down step by step until the two sides match to well beyond two decimals.
Here is how it plays out for $10,000 at 9% over 36 months with a $400 fee taken out of the loan. The monthly payment is figured on the full $10,000: $318.00. But you only get $9,600 to use, so the calculator looks for the monthly rate at which 36 payments of $318.00 are worth exactly $9,600. That rate, times 12, is the APR of 11.81%, about 2.81 percentage points above the interest rate.
As a check, appendix J includes a worked example: an amount of $5,000 repaid with 24 monthly payments of $230 has an APR of 9.69%. Enter it under Payment quote and the calculator gives 9.69%.
Fees paid upfront or added to the loan
Take a $10,000 loan at 9% for 36 months with a $400 fee:
| The fee is | Monthly payment | Interest and fees | APR |
|---|---|---|---|
| Paid upfront | $318.00 | $1,848 | 11.81% |
| Added to the loan | $330.72 | $1,906 | 11.70% |
Adding the fee to the loan costs more in dollars, because you pay interest on the fee for three years. Its APR is slightly lower, though, because the same fee is measured against the full $10,000 you receive instead of the $9,600 left after an upfront fee. The APR compares cost per dollar borrowed; for the total cost, look at the interest and fees.
Why fees weigh more on short loans
A fee is paid once, no matter how long the loan runs. On a short loan, it is spread over few months, so the yearly rate rises a lot. The same $10,000 at 9% with a $400 fee paid upfront:
| Term | APR |
|---|---|
| 12 months | 16.77% |
| 24 months | 13.10% |
| 36 months | 11.81% |
| 48 months | 11.16% |
| 60 months | 10.76% |
| 72 months | 10.50% |
If you plan to pay a loan off early, keep this in mind: the fee was already paid, so over the shorter time you actually keep the loan, it costs more per year than the APR you were quoted.
Comparing loan offers
The CFPB's advice for auto loans is to make sure you compare APRs to APRs, not APRs to interest rates, because the two are not the same. For mortgages it adds that you should not look at the APR alone, and that for adjustable-rate loans the APR does not reflect the maximum interest rate. In practice, put each offer in the calculator with its own fees and term, then look at three numbers side by side: the APR, the monthly payment you can afford, and the total interest and fees. For the full payment schedule of a loan, use the loan calculator.
How to use the APR calculator
- 1Choose Rate and fees if you know the interest rate, or Payment quote if you know the monthly payment.
- 2Enter the loan amount, the interest rate and the term. Add the fees as an amount or a percentage of the loan, and say whether you pay them upfront or add them to the loan. For a payment quote, enter the money you receive, the monthly payment and the term.
- 3Read the APR next to the interest rate, the monthly payment, the total of payments and the interest and fees. Compare other terms in the table, and copy the result or a link.
Frequently asked questions
What is the difference between the interest rate and the APR?
The interest rate is what the lender charges for the money you borrow. The APR also counts fees charged when the loan is made, such as origination charges, and expresses the whole cost as one yearly rate. That is why a loan with fees has an APR above its interest rate, and why the CFPB advises comparing APRs with APRs, not with interest rates.
How is APR calculated?
APR is the yearly rate at which the loan payments, discounted month by month, are worth exactly the amount financed: the money you actually get after fees taken upfront. There is no direct formula for it, so it is found step by step. The calculator narrows the monthly rate down until the payments match the amount financed, then multiplies it by 12.
Should I pay the fees upfront or add them to the loan?
Adding the fees to the loan means you pay interest on them too, so the total cost in dollars is higher. Paying upfront keeps the loan smaller but takes cash now, or reduces the money you receive when the lender deducts the fee. Switch between the two options in the calculator to compare the payment and the total cost.
Why is the APR so high on a short loan with fees?
A fee is a fixed cost, and on a short loan it is spread over only a few months. Expressed as a yearly rate, that weighs a lot. The same fee on a longer loan is spread over more months, so the APR moves closer to the interest rate, even though the total interest is higher.
Can I find the APR from a monthly payment?
Yes. Pick Payment quote, enter the money you receive, the monthly payment and the number of months. The calculator finds the rate at which those payments repay exactly that amount. This works for any fixed-payment offer, even when the lender does not tell you the interest rate.
Is the APR here the same as on my loan disclosure?
It should be close for a fixed-rate loan with equal monthly payments when you enter the same amount, payment schedule and fees. Small gaps can come from payments rounded to the cent, an odd first period or fees counted differently. For adjustable-rate loans the CFPB notes that the APR does not reflect the maximum interest rate.