APR vs interest rate: what is the difference?

Why APR is usually higher than the interest rate, how fees change it, and how to compare loans and savings fairly.

Loan offers usually show two numbers: an interest rate and an APR. They sound alike, but the APR also includes fees, which makes it the better number for comparing loans. The interest rate The interest rate is what the lender charges each year on the money you owe, and it sets your monthly payment. A $20,000 loan at 7% over 5 years has a payment of $396.02 a month, and you pay $3,761 in interest over the life of the loan. APR: the rate plus fees APR (annual percentage rate) adds most of the loan’s upfront fees — such as origination fees, mortgage points, and some closing costs — and spreads them over the loan as if they were extra interest. That gives one yearly figure for the full cost of borrowing. Because fees are included, the APR is higher than the interest rate whenever a loan has fees. If the two numbers are the same, no fees were counted. How a fee raises the APR Say the same $20,000 loan has a $600 origination fee taken out of the money you receive. You get $19,400 but still repay $396.02 a month for 5 years. Measured against what you actually received, the cost works out to an APR of about 8.29% — well above the 7% rate. Your total cost is the $3,761 of interest plus the …