Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) is the cost of borrowing money over a one-year period, including both interest and fees. To help people understand the true cost of borrowing, lenders use APR as it combines the interest rate and any additional fees into a yearly percentage. This makes comparing the cost of different loans or credit cards easier. Unlike the simple interest rate, which only considers the interest on the principal amount, the APR includes both the interest rate and most fees associated with the loan.

While APR is used to understand the cost of borrowing money, APY is used to understand the return on investment. APY reflects the true annual return on investment because it considers the effects of compounding. In contrast, APR does not take compounding into account.

Financial institutions are required to disclose their APR to potential borrowers, protecting clients from misleading advertising. However, financial institutions do have significant leeway in calculating the APR, so it may not always reflect the actual cost of borrowing.