The Annual Percentage Rate (APR) is a standardized way to express the true cost of borrowing money. Unlike the simple interest rate, APR includes not just the interest but also most fees and costs associated with the loan, giving you a more complete picture of what you'll actually pay.
For credit cards, APR represents the cost of carrying a balance on your card. If you pay your balance in full each month, you typically won't pay any interest. However, if you carry a balance, the APR determines how much interest accrues.
For mortgages and other loans, APR includes the interest rate plus points, mortgage broker fees, and certain other charges. This makes it easier to compare loan offers from different lenders, as required by the Truth in Lending Act (TILA).
It's important to understand the difference between APR and APY (Annual Percentage Yield). APR does not account for compound interest, while APY does. This distinction matters when comparing savings accounts or investment returns.
Key Takeaways
- APR includes fees, making it higher than the stated interest rate
- Credit cards can have different APRs for purchases, balance transfers, and cash advances
- Variable APR can change based on market conditions
- Promotional 0% APR offers can save money but require careful attention to terms