What is APR?

APR is short for “annual percentage rate” and represents how much you’ll pay to borrow money on an annual basis. It accounts for the interest rate and any upfront fees, and is expressed as a percentage of the loan amount. Many lenders are required to display APRs over interest rates so you can get a true sense of the cost to borrow money. For example, the average credit card APR is 21.59%, according to Federal Reserve data, while the average APR on a two-year personal loan is 12.49%.

You can also calculate the APR on loans that charge fees instead of interest to better compare the two types. We’ll cover how APR works, how it’s calculated, and how you can save money by comparing APRs.

How APR works

APR represents the annual cost to borrow money, which is expressed as a percentage of the loan amount. It applies to many different credit products, including mortgages, auto loans, personal loans, and credit cards. It differs from the interest rate alone because it also considers upfront fees, such as an origination fee or administration fee. For example, since credit card issuers don’t typically charge upfront fees, the interest rate and APR on credit cards may be interchangeable.

APR disclosures are designed to make it easier to see how much you'll pay for a loan or other credit account, and to better choose how you want to borrow. For example, APR makes it easy to compare how much you’d pay to carry a balance on a credit card versus taking out a personal loan with an origination fee.

What affects your APR?

The factors affecting your APR can vary by loan type and lender, but generally include:

In addition to these factors (credit score, history, and DTI), lenders may ask for proof of income and employment in the form of pay stubs or bank statements to evaluate the amount and consistency of your income, which can impact your rate. For example, lenders often have an annual income requirement, such as Upstart which requires that you earn at least $12,000 per year. 

When applying for an auto loan or mortgage, lenders use even more criteria to evaluate you and determine your APR. For example, an auto lender may look at your down payment amount and the age of your car. Mortgage lenders, on the other hand, may look at where the home is located and whether you choose a fixed-rate or variable-rate mortgage.

The federal funds rate

Interest rates, and therefore your APR, are also impacted by the federal funds rate, which the Federal Reserve adjusts in response to economic conditions. For example, when inflation is running high, the Fed may increase the target federal funds rate to slow down economic activity, making it more expensive for consumers and businesses to borrow. In fact, the Fed increased the effective federal funds rate from 5.08% to 5.33% July 27, 2023, which is where it’s remained since. 

Types of APR

The following are different types of APRs. Many, but not all, apply generally to credit cards.

• Introductory APR: Some credit card issuers offer low or 0% initial APRs for new cardholders or on balance transfer offers. This rate may stay in effect for six to 21 months. Once the introductory APR period is over, you’ll begin paying the regular APR on the entire balance.
• Purchase APR: This is the APR you’ll pay on credit card purchases after the grace period. If you pay off your balance on-time and in-full every month, you can avoid this APR.
• Cash advance APR: If you need to borrow cash from your credit card issuer, you’ll likely pay a separate APR that is higher than your purchase APR. In addition, the balance will typically start accruing interest right away on any cash advances.
• Penalty APR: If you violate the terms of your credit card agreement by paying late or missing a payment altogether, your credit card issuer may raise your APR temporarily. This is known as a penalty APR.
• Fixed APR: A fixed APR generally stays the same over time, unless you violate your agreement. If your APR is fixed, your lender or credit card issuer must notify you of changes to your APR.
• Variable APR: A variable APR fluctuates with the prime rate, so you may pay more to carry a balance in some months than others. Variable APRs are common with credit cards, and some types of mortgages and student loans.

How to find your APR

You can check your credit card statement or credit card agreement to find your credit card's APR. If you don’t have these documents available, you can also check your online account or call your credit card issuer and ask them to disclose your APR. For other loan types, you may also be able to check your statement or contact the lender directly.

How to calculate APR

The best way to calculate APR is with an APR calculator online, or with an amortization calculator. But, if you want to approximate the APR on a fixed-rate loan using a simple calculator like the one on your phone, use the formula below:

Formula: (Origination fee + total interest) / Amount borrowed / (Number of years in the loan) x 100

Let’s say you take out a personal loan for $20,000 with a term of seven years, an 8% interest rate, and a $200 origination fee. Here’s how you would calculate the APR. 

1. First approximate the total interest on the loan. You’d do this by multiplying the annual interest rate of 8% by the loan amount and the number of years in the repayment term.

• $20,000 x .08 x 7 years = $11,200

1. Then, add the origination fee to the interest amount and divide that by the amount borrowed.

• ($11,200 + $200) / $20,000 = 0.57

1. Finally, divide that number by the number of years in the loan and multiply by 100.

• (0.57/7) x 100 = 8.14% APR

However, the true APR on this loan is actually around 8.32%. That’s because as you pay down the loan, interest is only charged on the current balance that month (not on the original balance). APR calculators account for the reduction in principal and interest charges over the course of the loan since most lenders amortize payments. 

In other words, even though the amount you pay towards interest decreases (as the principal balance decreases), your monthly payment stays the same. 

APR vs. APY

Annual percentage rate (APR) and annual percentage yield (APY) both deal with interest rates, but in different ways. As previously mentioned, APR is the total expense of borrowing money, including interest and additional fees. APY, however, is the rate of return you can expect from saving or investing money. It represents how much you may earn, including compound interest.

APR generally applies when you owe money, and is used to express rate on: 

• Credit cards
• Auto loans
• Personal loans
• Home equity loans
• Home equity lines of credit
• Private student loans
• Personal lines of credit

Whereas APY generally applies when you’re saving money, and is used with: 

• High-yield savings accounts
• Money market accounts
• Certificates of deposit

Compare personal loan APRs

How to save money on credit card interest

Here’s how you can save money on credit card interest.

• Pay your balance on time and in full: You can avoid paying any interest on your credit card debt if you pay off your full balance within the grace period.
• Avoid late or missed payments: If you can’t pay your balance in full, pay at least the minimum payment or more by your due date. This will help you avoid a penalty APR.
• Use the debt avalanche method: If you have multiple credit cards, the debt avalanche method can help you decide how much to pay on each card. You’ll still make at least the minimum payment on all cards, but you’ll allocate any extra money you have toward the card with the highest APR until it’s paid off.
• Make multiple payments per month: Since credit card issuers calculate the interest you owe daily, you’ll pay less in interest if you make a payment multiple times a month.
• Consolidate your debt: You can use a balance transfer card, personal loan, or another low-interest loan to pay off your credit card debt. After consolidation, you’ll be left with one monthly payment and a lower APR.
• Apply for a low-interest credit card: If you expect to carry a balance temporarily, applying for a 0% introductory APR credit card can give you a break from paying interest.
• Ask for help: If you think you’ll carry a balance indefinitely, work with a nonprofit credit counseling agency to set up a budget that is more manageable. Otherwise, credit card debt can get out of hand. Your credit counselor can also enroll you in a debt management plan to help you get a handle on your current debts.

FAQ

What is a good APR for a credit card?

The current average APR across credit card accounts is 21.59% as of February 2024, so anything below that is relatively good. However, it’s possible to achieve an APR as low as 0% for a limited time if you take advantage of an introductory offer. On the other hand, you may pay a higher-than-average rate if you have bad credit or are just starting to build credit.

How does APR affect my monthly payments?

Your monthly payment for a loan is based on your loan amount, interest rate, and term, rather than your APR. APR is a way of looking at the total borrowing cost, including both interest and upfront fees.

In the case of a credit card, your minimum payment is calculated as a percentage of your statement balance plus interest and late fees, if any. Because your credit card APR is typically the same as your interest rate, a higher APR will mean a higher minimum monthly payment if you carry a balance.

Can APR change over time?

Yes. If you have a variable APR, it will change over time as the federal funds rate and prime rate change. Even if you have a fixed APR, it can change due to factors like late payments.

How does APR affect balance transfers?

Some credit card issuers may charge separate APRs for balance transfers and purchases. The higher the balance transfer APR, the more you’ll pay to carry the transferred balance on your new card. Many credit card issuers also offer a 0% APR on balance transfers for six to 21 months (after a balance transfer fee). After that, a regular variable APR will typically kick in.