What Is APR and How Do You Calculate It?

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Updated on Thursday, April 30, 2020

When you’re shopping around for credit, you’ll see the term APR thrown around. APR stands for annual percentage rate, and it’s a better representation of your cost for borrowing compared to the interest rate.

When comparing a debt’s APR versus its interest rate, you’ll often find that they’re different, though they’re both expressed as a percentage. Where the interest rate is what the lender charges you for borrowing funds, the APR takes into account the interest rate plus other costs and represents these fees as a yearly rate.

What is APR? A deeper dive

When you take out debt, such as a personal loan, you’ll repay the amount you borrowed plus fees. In addition to the interest rate, the APR may include other fees a borrower must pay to take out the loan. With a personal loan, this is likely to be an origination fee, which can range from 1% to 5%.

In order to know how to find the APR, look at your loan agreement. The federal Truth in Lending Act requires lenders to disclose the APR for any form of credit so borrowers understand the true cost of any loan. You’ll also find many lenders disclose upfront the APR ranges they charge. The better your credit and financial health, the lower the APR you can receive.

How do you calculate APR?

Calculating a loan’s APR involves a few steps. To learn how to calculate APR, you can use the formula above. You’ll need to gather the following information:

  • Loan amount
  • Interest owed over the life of the loan
  • Fees
  • Number of days in the loan term

Now that you have the formula and the information you need to calculate, let’s walk through a hypothetical situation to understand and see how the APR works.

Calculating your APR

Let’s say you are interested in taking out a $5,000 personal loan and want to compare rates. One lender is offering an interest rate of 8% with a 3% loan origination fee for a term of 12 months.

To determine your APR you need to add the fees and interest to the loan amount, calculate the monthly payment that includes the fees as part of the loan and then convert that amount into an interest rate.

With our $5,000 personal loan example:

First, calculate the interest and fees.
The origination fee would be $150 and the total interest is $400.00, for a total of $550.00.

Take that number and divide it by the loan amount.
$550.00 / $5,000 = 0.11

Next, divide the result by the term of the loan, calculated in days.
0.11 / 365 = 0.00030137

Then multiply that by 365 in a year.
0.00030137 x 365 = 0.11

Finally, multiply that by 100 to get the APR.
0.11 x 100 = 11.00%

Seeing the APR in action

Let’s now say we’re shopping around for different lenders. Take a look at how different interest rates can impact the APR and your monthly payment if your loan has a 36-month term for which the interest rates are different. The $5,000 loan has a 5% origination fee, so what would the APRs be for all three options?

APRs at a glance

Interest rate

5%

9%

13%

Loan fee*

$250

$250

$250

APR

8.46%

12.54%

16.63%

Monthly payments

$149.86

$159.00

$168.47

*Fee assumes 5% origination fee on $5,000 loan

Fixed APRs vs. variable APRs

A fixed APR is an annual percentage rate that is set for the term of the loan, while a variable APR is a percentage rate that can fluctuate. Fixed rates don’t change over the life of a loan — this means that if you take out a $5,000 personal loan with an 8.00% fixed interest rate, the rate will stay the same until the loan is paid off, no matter what happens in the economy.

A loan with a fixed APR has some advantages — offering a predictable payment, for example — and this can be helpful for planning a budget. Loans that typically have a fixed APR include:

  • Personal loans
  • Mortgages
  • Auto loans

Variable APRs are tied to a market index, such as a prime rate that is set by the Federal Reserve. A loan with a variable APR can be a good choice during an economy with a low prime rate, especially for borrowers who plan to pay it back in a short amount of time. In times of volatility, however, a variable APR can result in higher payments. Variable APR loans can include:

  • Most credit cards
  • Adjustable rate mortgages
  • Adjustable rate personal loans

What is the average APR for personal loans?

Before you take out a personal loan, you’ll need to understand how they work. The average APR among LendingTree users with a 720-plus credit score who received a loan offer in Q4 2019 was 7.63%. However, the average APR rises sharply for those with lower credit scores. That’s because your credit score signals to lenders how trustworthy you may be as a borrower — and the higher your score, the better.
Your credit score is based on factors such as:

  • Your payment history
  • Current debt balances
  • Length of credit
  • Types of credit
  • Number of new accounts

Lenders will also look at your debt-to-income ratio as well as your annual income.

The loan term may also impact your APR. Loans with shorter terms, such as 12 to 24 months, are generally offered at lower rates than longer-term loans. Plus, rates can also vary depending on the loan amount.

FAQ on APRs

Annual percentage rate. It is a yearly rate that represents your cost to borrow.

The APR definition is the true cost of borrowing money, including the interest rate as well as any required fees or charges.

The interest rate is the percentage of the borrowed principal charged by the lender for the use of its money. APR includes the interest rate as well as any fees or charges, expressed as a percentage.

APY stands for annual percentage yield, and it is the amount of interest earned through a savings or other type of investment account. The APR is the annual percentage rate that a borrower is charged on a loan or other type of credit account.

Credit cards can have various APR rates, based on the type of card and how you borrow with it. They include:

  • Balance transfer APR: The rate you pay on a balance transfered from another credit card.
  • Cash advance APR: What you’ll be charged if you take a cash advance on a credit card, which begins to accrue on the day the advance is taken.
  • Introductory purchase APR: A lower-than-normal APR you pay on purchases during a special introductory period.
  • Penalty APR: A higher APR you will be charged if your credit card payment becomes delinquent.
  • Purchase APR: This is the APR you pay on your credit card purchases.

A good APR will depend on your personal situation, including your credit history and financial health. Lenders use this information when extending credit card APR offers. In addition, the type of card you get, such as a card with no annual fee or that comes with rewards, can impact the APR you are charged.

With this in mind, the average minimum APR for all new card offers is 16.77%, according to CompareCards. The lowest minimum APR is for a secured card, which is 14.7%. The highest minimum is for a student credit card, at 22.2% APR.

APRs on personal loans can vary depending on your personal credit history. But they also can vary by lender, making it important to shop around when looking for a loan. MagnifyMoney’s personal loans marketplace offers an easy way to find low-APR loans by comparing rates as well as fees and requirements for qualification.

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