The interest rate is the cost of borrowing the principal alone. The APR (annual percentage rate) is the interest rate plus the fees a lender charges, spread across the loan and expressed as a single yearly rate. Same loan, two different numbers — and the APR is almost always the bigger one.
What each one includes
| Interest rate | APR | |
|---|---|---|
| Interest on the principal | Yes | Yes |
| Origination fee | No | Yes |
| Closing costs / points | No | Yes |
| Used to compute the payment | Yes | No |
Worked example: a $200,000 mortgage
Suppose the quoted rate is 6% over 30 years, and the lender charges $4,000 in closing costs. Your monthly principal-and-interest payment is based on the 6% rate:
- Monthly payment: $1,199.10
- Total interest at 6%: $231,676
But you effectively received only $196,000 after the $4,000 in fees, while still paying $1,199.10 per month. The rate that would produce that same payment on $196,000 is about 6.19% — that is the APR. The fees quietly added roughly 0.19 percentage points.
Which number should you use?
- Use the interest rate to see your actual monthly payment.
- Use the APR to compare competing offers on equal footing, because it folds fees into one figure.
- Beware: APR assumes you keep the loan for its full term, so on a loan you will repay early the APR can overstate the real cost.
Real-world traps
Introductory or "teaser" rates make the quoted interest rate look small while the fees stay hidden, so the APR is the more honest comparison. Discount points — paid up front to lower the rate — raise the APR immediately and only pay off if you stay in the loan long enough to recoup them, which can take years. Always compare offers using the same term and the same fee list, or the APR figures are not really comparable. A loan with a lower headline rate but heavy fees can cost more than one with a slightly higher rate and no fees.
The bottom line
When two loans quote the same interest rate but different fees, the one with the lower APR is cheaper over the long run. If you only know the payment and the term and want to discover the rate you are really being charged, work backwards: enter the loan amount, term and payment in our interest rate calculator to solve for the rate. Then read the principal, interest and total cost guide to see how fees land in your total cost.