What is the difference between APR, interest rate, and APY?
The interest rate is the price of the money, APR adds the lender's fees, and APY shows the effect of compounding. Don't mix them. As the CFPB puts it, compare APRs to APRs, not APRs to interest rates.
| Measure | What it counts | Where you see it | This loan |
|---|---|---|---|
| Interest rate | Interest only | Your note or loan offer | 8% |
| APR | Interest plus fees that count as finance charges | Truth in Lending disclosure | 8.86% |
| APY | Interest with compounding | Savings accounts and CDs | 8.3% if 8% compounds monthly |
Federal rules define APY for deposit accounts, as a rate reflecting the total interest paid on the account. So an APY quote usually means a savings product, not a loan. The "Effective annual rate" in the results applies the same compounding math to your APR. For savings goals, the savings calculator is the better fit.
How do you calculate APR with fees?
Find the rate at which your payments repay only the cash you received, then multiply by 12. There's no simple rearranged formula, so calculators solve it by trial. Here i is the monthly rate, and APR is i × 12.
Cash received = payment × (1 − (1 + i)^−n) ÷ iFor the default loan, the payment on $20,000 at 8% is $405.53. The $400 fee leaves $19,600. Solving gives 8.86%. In a spreadsheet, try this: =RATE(60,-405.53,19600)*12.
Why do fees matter more on short loans?
A short loan spreads the same fee over fewer months. A $500 fee on $10,000 at 10% gives an APR of 19.81% over 1 year, but 11.24% over 10 years.
| Term | Monthly payment | APR | Points added by the fee |
|---|---|---|---|
| 6 months | $1,715.61 | 28.1% | 18.10 |
| 12 months | $879.16 | 19.81% | 9.81 |
| 24 months | $461.45 | 15.18% | 5.18 |
| 36 months | $322.67 | 13.56% | 3.56 |
| 60 months | $212.47 | 12.24% | 2.24 |
| 120 months | $132.15 | 11.24% | 1.24 |
This doesn't mean the 10-year loan is cheaper. Its interest is $5,858, against $550 on the 1-year loan. APR tells you the yearly cost, and total dollars tell you the bill. Look at both.
Is the loan with the lowest APR always the cheapest?
No, and how long you keep the loan can flip the answer. These three example offers are all for $20,000 over 60 months, and they're the ones loaded in the comparison above.
| Offer | Rate and fee | APR | Full-term cost | Cost if paid off early | APR if paid off early |
|---|---|---|---|---|---|
| Bank | 8% + $400 | 8.86% | $4,732 | $3,074 | 9.31% |
| Online lender | 7.25% + $1,000 | 9.43% | $4,903 | $3,416 | 10.57% |
| Credit union | 8.75% + $0 | 8.75% | $4,765 | $2,933 | 8.75% |
The online lender has the lowest rate and the highest APR, so its $1,000 fee outweighs its rate. The credit union has the lowest APR at 8.75%. Yet over the full term, the bank costs $33 less in total. That happens because APR counts timing. The bank's fee comes out on day one, and a dollar paid up front weighs more than a dollar paid in year five.
Now suppose you pay off or refinance after 24 months. The fee doesn't shrink, so the bank's APR rises to 9.31% and the online lender's to 10.57%, while the credit union's stays at 8.75%. In dollars, the credit union now beats the bank by $141. The stated APR assumes you keep the loan for the full term. If you expect to pay early, lean toward low fees. Offers also only compare cleanly when the amount and term match.
What does the Truth in Lending Act count in APR?
It counts finance charges, and not every closing cost is one. Under Regulation Z, which implements the act, points, loan fees, and finder's fees are finance charges. On real estate loans, fees such as title work and a pre-closing appraisal are left out if they're legitimate and reasonable in amount. So a mortgage APR can miss real costs you'll pay.
Your lender generally must disclose the APR, described as the cost of your credit as a yearly rate. On a regular loan, that figure counts as accurate if it's within 1/8 of a percentage point, and within 1/4 of a point on irregular loans. Expect small gaps between this calculator and your disclosure, and rely on the disclosure.
Long terms hide fees too. Take a $350,000, 30-year mortgage at 6.25% with 1% origination, 1 point, $2,500 in other charges, and 15 days of prepaid interest. That's $10,399 up front, yet the APR is only 6.54%. If you'd sell or refinance in a few years, that low APR understates your cost. Discount points and prepaid days are in the advanced options.
When this APR estimate can mislead you
This calculator assumes equal monthly payments and a fixed rate. Its APR won't reflect a variable-rate loan's future changes or a balloon payment. For balloon and interest-only terms, use the business loan calculator. Put only true finance charges under "Other finance charges," or your APR will run above the legal figure.
A HUD-approved housing counselor can go through mortgage disclosures with you. For other debts, a nonprofit credit counselor can help you weigh your options. If a fee or rate on your disclosure doesn't match what you were told, ask the lender to explain it in writing before you sign.
Common questions
What is 24% APR per month?
About 2% a month, since a monthly rate is the APR divided by 12. On a $5,000 balance, that's about $100 of interest in a month.
Is APR the same as the interest rate on a credit card?
The CFPB describes a card's APR as its interest rate quoted yearly. On most cards, you can avoid interest on purchases by paying the full balance by the due date. To see what a balance costs over time, use the credit card payoff calculator.
How do I find my APR if I only know the payment?
Subtract any upfront fees from the loan amount, then solve for the rate. Borrow $10,000 with a $300 fee and pay $350 for 36 months, and the APR is 17.86%. Use Rate mode in the loan calculator and enter the fee under Fees.
How do I convert APR to APY?
Use APY = (1 + APR ÷ 12)^12 − 1 for monthly compounding. A 12% APR compounded monthly is 12.68% a year.
Does a down payment change the APR?
Only when fees are a flat amount. Enter the loan after your down payment. A flat $500 fee at 8% for 60 months gives 9.08% on $20,000 and 9.45% on $15,000, since the fee is a larger share of a smaller loan. A percentage fee scales with the loan, so the APR stays the same.
How do I find the APR on a car loan?
With no finance charges beyond interest, APR equals the stated rate. Enter any others under "Other finance charges." A $30,000 loan at 7% for 72 months is a 7% APR with no fee and 7.6% with a $500 fee. For trade-ins and sales tax, use the auto loan calculator.
Sources
- What is the difference between a loan interest rate and the APR? · Consumer Financial Protection Bureau
- Regulation Z § 1026.4: Finance charge · Consumer Financial Protection Bureau
- Regulation Z § 1026.22: Determination of annual percentage rate · Consumer Financial Protection Bureau
- Regulation Z § 1026.18: Content of disclosures · Consumer Financial Protection Bureau
- Regulation DD § 1030.2: Definitions · Consumer Financial Protection Bureau
- What is a credit card interest rate? What does APR mean? · Consumer Financial Protection Bureau