If you’re buying a house, using a credit card or borrowing money for any other reason, it’s important to know what APR stands for.
When it comes to taking out a loan, details matter. However, it’s common for first-time borrowers to be overwhelmed by the different numbers and technical terms that are attached to a loan. Interest rates, mortgage rates, APR, APY—there are meaningful differences between these terms, and if you don’t know what these terms refer to, it’s easy to feel intimidated.
Don’t worry. We’re here to help you decode these words and help you understand what APR means. The next time you take out a loan, you’ll feel empowered with the knowledge of the exact amount you’ll owe each month and the time remaining on your loan.
What Is the Meaning of APR?
APR stands for “annual percentage rate.” One of the most common questions people ask is, “What is APR on a loan?” When you take out a loan, whether it’s related to a home mortgage, a credit card or any other sum you borrow from a bank, you have to repay the principal (the amount you borrowed) plus the interest you pay each year, as well as any additional fees.
Many borrowers also ask, “Is an APR the same as an interest rate?” The answer is “Yes, but it’s also more than that.” That’s because APR reflects the “interest and fees” portion of this equation. These fees can include things like closing costs and broker fees. APR, then, is usually a higher figure than the interest rate alone.
How Does APR Work?
Let’s say you take out a 30-year mortgage for $100,000 (the principal). The interest rate is 5%, and you have closing costs of $5,000 that are added to that principal. So while the interest rate is only 5%, the APR would be 5.43%, because the additional fees were added to the total amount you borrowed.
To get a sense of how APR affects the total amount you’ll have to repay over the life of a loan, you can use an APR interest calculator. Using the same $105,000 figure, we see that over the 30-year term of the mortgage, the total interest you’ll pay is nearly $103,000. This is a significant sum, of course, which is why it’s so important to compare APR when you borrow money.
What’s a Good APR?
The answer depends on timing—the average APR at the time you take out the loan—and the type of loan you’re taking out. Most credit cards, for example, tend to have higher APRs than home mortgages. In August 2023, the average credit card APR was just over 21%, while the average APR on a 30-year mortgage for the same month was a little over 7%.
As you can see, it’s important to do an apples-to-apples comparison of APR when you’re borrowing money. You should look at the APRs of several credit cards before you commit to one, just as you should review the APR details of different mortgages before borrowing.
Now that you know the basics of APR, you can be a smart shopper and find a loan with a competitive rate.
Three Things to Do
- Read more about the differences between interest and APR.
- Compare current credit cards and APRs.
- Learn more about applying for a home loan, or contact a mortgage lender at Regions.
