APR vs Interest Rate: What's the Difference?

When you’re shopping for a loan or credit card, you’ll see two numbers that look similar but mean different things: the interest rate and the APR. They’re related, but they’re not the same — and knowing the difference can save you from picking a deal that looks great on the surface but costs more than you expected.

What Is an Interest Rate?

The interest rate is the basic percentage a lender charges you to borrow money. It’s the core cost of the loan, and it determines how much interest accrues on your balance each month or year.

For example, if you take out a $10,000 personal loan with a 7% interest rate, that 7% is what the lender charges you on your outstanding balance. It doesn’t include any other costs — just the interest itself.

What Is APR?

APR stands for Annual Percentage Rate. It includes the interest rate plus other fees and costs rolled into the loan. This gives you a more complete picture of what borrowing that money actually costs you per year.

Those extra costs might include:

• Origination fees — a one-time charge some lenders take out of your loan amount
• Closing costs — common with mortgages
• Mortgage insurance premiums
• Certain broker fees

So if that same $10,000 loan has a 7% interest rate but the lender also charges a 2% origination fee, the APR might be closer to 8.5%. The APR reflects the true annual cost of borrowing.

Why APR Matters More

Here’s the key takeaway: the interest rate tells you part of the story, but the APR tells you the whole story. Two loans can have the exact same interest rate but very different APRs depending on their fees.

Imagine you’re comparing two personal loans:

• Loan A: 8% interest rate, no origination fee. APR: 8%
• Loan B: 7.5% interest rate, 3% origination fee. APR: 9.2%

Loan B looks cheaper at first glance because of the lower interest rate. But once you factor in the origination fee, it’s actually the more expensive option. The APR makes that clear instantly.

How APR Works With Credit Cards

Credit card APR works a little differently. Since credit cards don’t typically have origination fees or closing costs, the APR and interest rate are usually the same number. But there are a few things to watch for:

• Variable APR means your rate can change over time, often tied to the prime rate set by the Federal Reserve. Most credit cards have variable APRs.
• Introductory APR is a temporary lower rate (sometimes 0%) that lasts for a set period, usually 6 to 21 months. After that, the regular APR kicks in.
• Penalty APR is a much higher rate that can apply if you miss payments. It can jump to 29.99% or higher.

When comparing credit cards, look at the regular APR — not just the introductory offer. That’s the rate you’ll live with long-term.

Fixed vs Variable APR

A fixed APR stays the same for the life of the loan. This is common with federal student loans and some personal loans. You know exactly what you’ll pay, which makes budgeting easier.

A variable APR can go up or down based on market conditions. Credit cards, adjustable-rate mortgages, and some private student loans use variable rates. When rates rise, your monthly costs can increase too.

How to Use APR When Comparing Loans

When you’re comparing borrowing options, follow these steps:

1. Look at the APR, not just the interest rate. The APR includes fees, so it’s the better comparison tool.
2. Compare the same loan types. APR on a mortgage works differently than APR on a credit card. Compare apples to apples.
3. Check if it’s fixed or variable. A lower variable APR today might end up higher than a fixed rate down the road.
4. Read the fine print. Some loans have prepayment penalties or other charges that aren’t included in the APR.

A Quick Example

You’re looking at two auto loans for $15,000 over 5 years:

• Dealer financing: 4.5% interest rate, $500 in fees. APR: 5.1%
• Credit union loan: 5.0% interest rate, no fees. APR: 5.0%

The credit union loan has a higher interest rate but a lower APR — meaning it’s the cheaper option overall. Without looking at APR, you might have gone with the dealer and paid more.

Bottom Line

The interest rate is the base cost of borrowing, while the APR includes fees and gives you the full picture. When comparing loans, always use the APR — it’s the most reliable way to see what you’ll actually pay. A lower interest rate doesn’t always mean a better deal once all the costs are factored in.