What is APR?
The Annual Percentage Rate (APR) represents the true yearly cost of borrowing money, including both the nominal interest rate and mandatory lender origination or closing fees.
Unlike the simple interest rate, the APR gives you a complete picture of what a loan will actually cost. For example, a mortgage might advertise an interest rate of 6.00%, but once you include origination fees and prepaid finance charges, the APR might be 6.22%.
Fixed vs. Variable APR
- Fixed APR: The rate remains locked over the entire life of the loan. Common for personal loans, auto loans, and 15/30-year fixed-rate mortgages.
- Variable APR: The rate fluctuates based on an underlying benchmark index (such as the U.S. Prime Rate or SOFR). Common for credit cards, HELOCs, and Adjustable-Rate Mortgages (ARMs).
Why APR Matters
Under the federal Truth in Lending Act (TILA), lenders must disclose the APR inside the Schumer Box before you sign a credit agreement so you can compare competing offers on an apples-to-apples basis.