TILA
Law requiring APR disclosure (Truth in Lending Act)
3 days
When lenders must provide Loan Estimate with APR
0.1–0.5%
Typical gap between rate and APR on a mortgage
20–30%+
APR on many credit card cash advances
How APR is calculated
APR converts the total cost of credit — interest plus mandatory fees — into an equivalent annual interest rate. The calculation finds the rate at which the present value of all future loan payments equals the amount you actually received (loan proceeds minus fees). Because fees are amortized over the loan term, a short-term loan with even modest fees can have a dramatically higher APR than its stated rate.
APR vs. interest rate: what's the difference
- Interest rate: the annual cost of the loan principal alone, used to calculate your monthly payment
- APR: includes origination fees, broker fees, points, and mortgage insurance — but not title, appraisal, or prepaid items
- On a 30-year fixed mortgage: APR is typically 0.1–0.5% higher than the rate
- On a 5-year auto loan: the gap is usually negligible since few fees are rolled in
- On a payday loan: the APR can be 300–400% despite a modest per-loan fee
How to use the APR calculator
- Enter the loan amount and stated interest rate
- Enter the loan term in months
- Add all upfront fees: origination fee, points, broker fee
- The calculator computes the effective APR for comparison
- Run it for each loan offer to identify the true lowest-cost option
- Compare APRs — the lower APR is cheaper if you hold the loan to maturity
ℹ️ APR assumes you keep the loan to term
APR calculations assume you hold the loan for its full term. If you expect to refinance or move within 5 years, a loan with higher fees but a lower rate may actually cost more per year than its APR suggests — run the break-even analysis instead.
Common mistakes to avoid
- Comparing APR across different loan terms — a 15-year and 30-year mortgage APR aren't directly comparable
- Ignoring APR on credit cards and only looking at the periodic rate
- Assuming the lowest APR is always best — if you'll sell the home in 3 years, lower upfront fees may win
- Not checking whether the APR includes mortgage insurance (for FHA loans it does, making comparison tricky)
- Trusting verbal APR quotes — the written Loan Estimate is the legally required disclosure
Related calculators
Use the Mortgage Calculator to model your actual monthly payment once you know the rate. The Auto Loan Calculator lets you input APR directly to compare financing offers. For credit card debt, the Credit Card Payoff Calculator shows total interest cost regardless of how APR is quoted.