Annual Percentage Rate (APR)

What Is Annual Percentage Rate (APR)?

The annual percentage rate, or APR, expresses the yearly cost of borrowing on a loan or credit card. It is generally a nominal rate, meaning it states the annual interest before fully accounting for how frequently interest compounds within the year. On credit products it commonly captures interest and, depending on the loan type, certain fees, giving a standardized figure for comparing offers. Because APR is nominal, the effective amount actually paid can be somewhat higher when interest compounds monthly or daily, since compounding adds interest on interest between statements. APR is the borrowing-side counterpart to the annual percentage yield used on deposits. It is a required disclosure on many consumer credit products, which is intended to let borrowers compare the cost of credit on consistent terms.

Why It Matters

APR matters because it provides a common yardstick for the price of credit, letting different loans and cards be lined up side by side. The rate directly influences how much a balance costs to carry: a high APR combined with compounding is why a credit-card balance can grow quickly when only minimum payments are made, since unpaid interest is added back and then accrues further interest. Recognizing that APR is nominal also explains why the effective cost can exceed the stated number once compounding frequency is included, paralleling how APY reveals compounding on the savings side. A strong credit history tends to affect the APR and terms a borrower is offered, which links credit scores to the real cost of borrowing.