What Is APR and How Do You Calculate It?

When you’re shopping around for credit, you’ll see the term APR thrown around. APR stands for annual percentage rate, and it’s a better representation of your cost for borrowing compared to the interest rate.

When comparing a debt’s APR versus its interest rate, you’ll often find that they’re different, though they’re both expressed as a percentage. Where the interest rate is what the lender charges you for borrowing funds, the APR takes into account the interest rate plus other costs and represents these fees as a yearly rate.

What is APR? A deeper dive

When you take out debt, such as a personal loan, you’ll repay the amount you borrowed plus fees. In addition to the interest rate, the APR may include other fees a borrower must pay to take out the loan. With a personal loan, this is likely to be an origination fee, which can range from 1% to 5%.

In order to know how to find the APR, look at your loan agreement. The federal Truth in Lending Act requires lenders to disclose the APR for any form of credit so borrowers understand the true cost of any loan. You’ll also find many lenders disclose upfront the APR ranges they charge. The better your credit and financial health, the lower the APR you can receive.

How do you calculate APR?

Calculating a loan’s APR involves a few steps. To learn how to calculate APR, you can use the formula above. You’ll need to gather the following information:

  • Loan amount
  • Interest owed over the life of the loan
  • Fees
  • Number of days in the loan term

Now that you have the formula and the information you need to calculate, let’s walk through a hypothetical situation to understand and see how the APR works.

Calculating your APR

Let’s say you are interested in taking out a $5,000 personal loan and want to compare rates. One lender is offering an interest rate of 8% with a 3% loan origination fee for a term of 12 months.

To determine your APR you need to add the fees and interest to the loan amount, calculate the monthly payment that includes the fees as part of the loan and then convert that amount into an interest rate.

With our $5,000 personal loan example:

First, calculate the interest and fees.
The origination fee would be $150 and the total interest is $400.00, for a total of $550.00.

Take that number and divide it by the loan amount.
$550.00 / $5,000 = 0.11

Next, divide the result by the term of the loan, calculated in days.
0.11 / 365 = 0.00030137

Then multiply that by 365 in a year.
0.00030137 x 365 = 0.11

Finally, multiply that by 100 to get the APR.
0.11 x 100 = 11.00%

Seeing the APR in action

Let’s now say we’re shopping around for different lenders. Take a look at how different interest rates can impact the APR and your monthly payment if your loan has a 36-month term for which the interest rates are different. The $5,000 loan has a 5% origination fee, so what would the APRs be for all three options?

APRs at a glance
Interest rate5%9%13%
Loan fee*$250$250$250
Monthly payments$149.86$159.00$168.47

*Fee assumes 5% origination fee on $5,000 loan

Fixed APRs vs. variable APRs

A fixed APR is an annual percentage rate that is set for the term of the loan, while a variable APR is a percentage rate that can fluctuate. Fixed rates don’t change over the life of a loan — this means that if you take out a $5,000 personal loan with an 8.00% fixed interest rate, the rate will stay the same until the loan is paid off, no matter what happens in the economy.

A loan with a fixed APR has some advantages — offering a predictable payment, for example — and this can be helpful for planning a budget. Loans that typically have a fixed APR include:

  • Personal loans
  • Mortgages
  • Auto loans

Variable APRs are tied to a market index, such as a prime rate that is set by the Federal Reserve. A loan with a variable APR can be a good choice during an economy with a low prime rate, especially for borrowers who plan to pay it back in a short amount of time. In times of volatility, however, a variable APR can result in higher payments. Variable APR loans can include:

  • Most credit cards
  • Adjustable rate mortgages
  • Adjustable rate personal loans

What is the average APR for personal loans?

Before you take out a personal loan, you’ll need to understand how they work. The average APR among LendingTree users with a 720-plus credit score who received a loan offer in Q4 2019 was 7.63%. However, the average APR rises sharply for those with lower credit scores. That’s because your credit score signals to lenders how trustworthy you may be as a borrower — and the higher your score, the better.
Your credit score is based on factors such as:

  • Your payment history
  • Current debt balances
  • Length of credit
  • Types of credit
  • Number of new accounts

Lenders will also look at your debt-to-income ratio as well as your annual income.

The loan term may also impact your APR. Loans with shorter terms, such as 12 to 24 months, are generally offered at lower rates than longer-term loans. Plus, rates can also vary depending on the loan amount.

What does APR stand for?

Annual percentage rate. It is a yearly rate that represents your cost to borrow.

What is the definition of APR?

The APR definition is the true cost of borrowing money, including the interest rate as well as any required fees or charges.

What is the difference between APR and interest rate?

The interest rate is the percentage of the borrowed principal charged by the lender for the use of its money. APR includes the interest rate as well as any fees or charges, expressed as a percentage

What is the difference between APR and APY?

APY stands for annual percentage yield, and it is the amount of interest earned through a savings or other type of investment account. The APR is the annual percentage rate that a borrower is charged on a loan or other type of credit account.

What are the different APRs on credit cards?

Credit cards can have various APR rates, based on the type of card and how you borrow with it. They include:

  • Balance transfer APR: The rate you pay on a balance transfered from another credit card.
  • Cash advance APR: What you’ll be charged if you take a cash advance on a credit card, which begins to accrue on the day the advance is taken.
  • Introductory purchase APR: A lower-than-normal APR you pay on purchases during a special introductory period.
  • Penalty APR: A higher APR you will be charged if your credit card payment becomes delinquent.
  • Purchase APR: This is the APR you pay on your credit card purchases.

What is a good APR for a credit card?

A good APR will depend on your personal situation, including your credit history and financial health. Lenders use this information when extending credit card APR offers. In addition, the type of card you get, such as a card with no annual fee or that comes with rewards, can impact the APR you are charged.

With this in mind, the average minimum APR for all new card offers is 16.77%, according to CompareCards. The lowest minimum APR is for a secured card, which is 14.7%. The highest minimum is for a student credit card, at 22.2% APR.

Where can I find low-APR personal loans?

APRs on personal loans can vary depending on your personal credit history. But they also can vary by lender, making it important to shop around when looking for a loan.

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Author D Laidler

I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go.  I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.

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A personal loan is a medium term loan with a fixed interest rate that is repaid in equal monthly payments and it's usually limited to 24 months. Loan offers and eligibility depend on your individual credit profile. Our lenders can help you obtain as much as $3,000 depending on the lender, your state and your financial situation.

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APR (Annual Percentage Rate) is the loan rate calculated for the annual term. Since businessfinancenews.com is not a lender and has no information regarding the terms and other details of personal loan products offered by lenders individually, businessfinancenews.com cannot provide the exact APR charged for any loan product offered by the lenders. The APRs greatly vary from lender to lender, state to state and depend on numerous factors, including but not limited to the credit standing of an applicant. Additional charges associated with the loan offer, including but not limited to origination fees, late payment, non-payment charges and penalties, as well as non-financial actions, such as late payment reporting and debt collection actions, may be applied by the lenders. These financial and non-financial actions have nothing to do with businessfinancenews.com, and businessfinancenews.com has no information regaining whatsoever actions may be taken by the lenders. All the financial and non-financial charges and actions are to be disclosed in any particular loan agreement in a clear and transparent manner. The APR is calculated as the annual charge and is not a financial charge for a personal loan product. 

Late Payment Implications

It is highly recommended to contact the lender if late payment is expected or considered possible. In this case, late payment fees and charges may be implied. Federal and state regulations are determined for the cases of late payment and may vary from case to case. All the details concerning the procedures and costs associated with late payment are disclosed in loan agreement and should be reviewed prior to signing any related document. 

Non-payment Implications

Financial and non-financial penalties may be implied in cases of non-payment or missed payment. Fees and other financial charges for late payment are to be disclosed in loan agreement. Additional actions related to non-payment, such as renewals, may be implied upon given consent. The terms of renewal are to be disclosed in each loan agreement individually. Additional charges and fees associated with renewal may be applied. 

Debt collection practices and other related procedures may be performed. All the actions related to these practices are adjusted to Fair Debt Collection Practices Act regulations and other applicable federal and state laws in order to protect consumers from unfair lending and negative borrowing experience. The majority of lenders do not refer to outside collection agencies and attempt to collect the debt via in-house means. 

Non-payment and late payment may have negative impact on the borrowers’ credit standing and downgrade their credit scores, as the lenders may report delinquency to credit bureaus, including but not limited to Equifax, Transunion, and Experian. In this case the results of non-payment and late payment may be recorded and remain in credit reports for the determined amount of time.