When you shop for a loan, two numbers appear: the interest rate and the APR. They are not the same, and confusing them can cost you. The interest rate is the pure cost of borrowing the principal. The APR — annual percentage rate — folds in certain fees to show the true yearly cost.
Why APR is usually higher
Because APR includes origination fees, points, and some closing costs spread across the life of the loan, it is almost always higher than the headline interest rate. A mortgage advertised at 6.0% might carry a 6.25% APR once fees are baked in. That gap is a quick signal of how expensive the fees are.
Where APR falls short
APR assumes you keep the loan for its full term. If you sell your house or refinance in a few years, the upfront fees weigh more heavily than APR suggests, so a lower-fee loan with a slightly higher rate can be cheaper in practice. APR also does not capture compounding on credit cards well, since it ignores how often interest is applied.
Comparing offers the right way
Use APR to compare two loans of the same type and term. For different terms, compare the total amount you will actually pay. Never compare a 15-year loan APR to a 30-year one and assume the lower number wins.
Frequently asked questions
Is a lower APR always better?
Usually, but only when the loan type, amount, and term match. Otherwise total cost is the better yardstick.
What is APY?
APY (annual percentage yield) is the savings-side twin of APR and does account for compounding, which is why it appears on deposit accounts.
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Results are general information only and not professional financial, medical, or legal advice.