What is APR?

Annual percentage rate is the cost of borrowing money

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If you’ve ever taken out a loan or opened a new credit card, then you’ve come across the term annual percentage rate (APR). It's a standard way for lenders to express the cost of borrowing and can significantly impact your wallet. Your APR can be the difference between saving or wasting thousands of dollars, depending on your loan size and rate.

Here’s what you need to know about APR, how it’s calculated and why you should pay attention to it.

Key insights

  • When you’re comparing rates, it's important to look at the APR rather than just the interest rate to know how much you’ll be paying.
  • A mortgage loan can have a lower APR than a credit card because the mortgage is secured by the property.
  • Some loans may have a variable APR that can change over time based on market conditions.

Annual percentage rate definition

APR is the yearly rate you pay on a loan or credit card balance for a year. The APR takes into account not just the interest rate but also any fees or charges associated with the loan or credit card. This means that the APR gives you a more accurate picture of the true cost of borrowing than the interest rate alone.

APR vs. interest rate

When shopping for loans, you’ll see two figures given: the interest rate and the APR. The interest rate is the annual percentage of the principal that a lender charges for borrowing money.

The APR includes the interest rate and other fees borrowers may be charged — such as origination fees and closing costs. It provides a more complete picture of the true cost of borrowing and enables borrowers to accurately compare loan offers.

» MORE: 5 best personal loans for good credit

How is APR calculated?

APR is calculated by taking the interest rate and adding any fees or charges associated with the loan or credit card. For example, if you have a credit card with an interest rate of 15% and an annual fee of $50, the APR would be higher than 15% because you're also paying the $50 fee.

The exact formula for calculating APR can be complex, but there are plenty of online calculators that can help you determine APR for a loan or credit card.

Your exact APR will depend on your credit score and creditworthiness. Factors like income can affect it more than your credit score. One ConsumerAffairs reviewer from California said, “I applied for a personal loan with a 809 credit score and I was approved with a 9.36% APR. Sent my income and they came back with a much higher APR, 15.30%.”


While both terms represent rates, both affect consumers in different ways. Annual percentage yield (APY) is the rate you’ll earn on savings products, such as a savings account or certificate of deposit (CD). The higher the APY, the more money you’ll earn on your savings and investments.

When you finance a purchase through a loan or credit card, you’ll be charged an APR — at charge for borrowing money. In this case, a low APR is ideal because it means you’ll pay less money to the lender or creditor.

» MORE: What is an APY?

What is a good APR?

Good APRs are dependent on having a good credit score and creditworthiness. “A good APR is somewhat relative,” said Matt Schulz, chief credit analyst at LendingTree. “If you have crummy credit and you get a rate of 24%, that can be a real victory, especially if your previous card had a rate of 30% or higher.”

Schulz looks at more than 210 credit card offers each month, and at the time of publishing, only 17 had an APR of 15% or lower. “If you can find a credit card APR of 15% or lower, you’ve done a good job,” he said.”The average APR on all of the cards I reviewed was 23.84%, with an average range of 20.35% to 27.31%. That means that even someone with the best credit is likely to get stuck with a rate of 20% or higher.”

Personal loans and mortgages will have different ranges for what is considered a good APR. Many times, a mortgage rate will be lower because it is a secured loan — that is, a loan backed by collateral and therefore less risky. “For home loans, if you can get a 30-year loan for under 6% right now, that's a great APR,” said Derek Sall, founder and lead of LifeAndMyFinances.

No matter what type of loan you’re shopping for, it is important to go in with a strong credit score and request rates from multiple lenders before choosing.

» MORE: Personal loan vs. credit card: Which is better?

Variable vs. fixed APR

When you apply for a new loan, you may have the choice of a variable or fixed APR. Both have their own advantages and disadvantages, especially in an economic market prone to ups and downs.

A variable APR is one that changes based on market conditions. Credit card rates are variable rates and can go up without you realizing it. You can choose a variable APR for a personal loan, auto loan or mortgage.

The top benefit to variable APRs is that you can start at a lower interest rate, but there is always the risk that this rate will go up before your term ends.

A fixed APR allows you to lock in your rate for your financing. For example, if you lock in a low rate for a five-year personal loan, the rate will stay the same even if rates are rising overall.

Fixed-rate loans are easier to plan your budget around, but you’ll miss out on savings if market rates drop.

How to use APR to your advantage

You can use APR to your advantage to save money and pay off your debt quicker. If you have an excellent credit score and other signs of creditworthiness, such as a low debt-to-income (DTI) level and high income, you should get the best rate possible.

Here are a few ways you can use APR to your advantage:

  • Shop around for the lowest APR. Before taking out a loan or credit card, research different lenders and compare their APRs. Some lenders might match other lenders' rates if asked. Even shaving off .50% on your APR can save you money.
  • Pay off debt with high APRs first. If you have multiple loans or credit cards, prioritize paying off those with the highest APRs first. This will help you reduce the interest and fees you pay over time and save you money in the long run.
  • Negotiate a lower APR. If you have good credit, you may be able to negotiate by contacting your lender and asking if it can offer you a better rate. If you have a good payment history, you may be able to secure a lower APR.

» MORE: Best balance transfer credit cards

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Are there any loans or credit cards with a 0% APR?

While most loans do not come with 0% APR, there are credit cards that do offer it. According to Schulz: “Many cards offer introductory 0% deals on balance transfers for a year or more, sometimes up to 21 months. And many of those cards also offer 0% APRs on new purchases, too.”

Can I negotiate my APR with a lender?

It’s possible to negotiate your APR with a lender. However, the success of your negotiation will depend on several factors, including your credit history, your income and the lender's policies. If you’ve used the lender in the past, there might be more wiggle room for negotiation.

How can I find out what APR I qualify for?

Depending on which type of financing you’re applying for, many lenders will allow you to check your rate or approval chances. Make sure these are soft pulls of your credit, not hard pulls.

Bottom line

When it comes to shopping for rates, you want to look at the APR rather than just the interest rate, since the APR gives you a complete picture of how much a loan or credit card will cost you. To get the lowest APR, make sure you’ve taken steps to maximize your credit score, and search for offers from multiple lenders before making a borrowing decision.

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