APR Meaning: What Is Annual Percentage Rate?

Basic Definition

APR, or Annual Percentage Rate, is the yearly cost of borrowing money, expressed as a percentage. It includes not only the interest rate but also certain fees and other costs, giving borrowers a clearer picture of how much they will pay over a year.

APR vs. Interest Rate

While an interest rate only reflects the cost of borrowing money, the APR gives a broader view by including fees such as loan origination costs, mortgage insurance, or credit card charges. This makes APR a more comprehensive measure when comparing loans or credit products.

Types of APR

• Fixed APR: Stays the same for the life of the loan.
• Variable APR: Can change over time based on market conditions or a benchmark index.
• Purchase APR: Applied to everyday purchases made with a credit card.
• Cash Advance APR: A higher rate charged when borrowing cash from a credit card.
• Penalty APR: A higher rate triggered by late or missed payments.

Why APR Matters

APR helps consumers compare different financial products fairly. For example, two loans might advertise the same interest rate, but the one with higher fees will show a higher APR. By looking at APR, you get a more accurate view of the true cost of borrowing.

Examples of Use

• “This credit card offers a 19% APR on purchases.”
• “My mortgage has a 6% interest rate, but the APR is 6.5% once fees are included.”
• “Always compare APRs when shopping for personal loans.”

Conclusion

APR is a key financial term that represents the annual cost of borrowing, including both interest and fees. Understanding APR allows you to make smarter financial decisions, avoid hidden costs, and choose the loan or credit card that truly suits your budget.

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