Annual Percentage Rate (APR)

The annual percentage rate (APR) is the standardized measure of the true cost of borrowing money over a year, combining the nominal interest rate with certain lender fees such as loan origination charges or documentation costs. Unlike the basic interest rate, which only reflects the cost of borrowing principal, the APR provides a more complete picture of what a borrower will actually pay. This makes it especially useful for comparing loan offers from different lenders, as some may advertise low interest rates but add significant fees that increase the overall cost. By law, lenders in the U.S. are required to disclose the APR to promote transparency and protect consumers. The APR is expressed as a percentage and applied to the outstanding loan balance, spreading both interest and fees over the repayment period. For example, a loan with a 5% interest rate but high upfront fees might have an APR of 6% or higher. Because APR incorporates fees, it often better reflects the real cost of borrowing than the nominal rate alone. Understanding APR is crucial for car buyers, as even small differences can amount to hundreds or thousands of dollars over the loan’s lifetime. Borrowers should always compare APRs when evaluating loan offers and avoid focusing solely on monthly payments, which can obscure true costs.

APR = (Total Interest + Fees) ÷ Loan Amount ÷ Number of Years