What is APR?

It costs money to borrow money, but how much you’ll pay depends on the lender and your financial profile. To compare what it will cost to borrow across different loans and loan types, it’s helpful to look at the annual percentage rate (APR).

APR represents how much you’ll pay to borrow money on an annual basis. It includes interest and upfront fees, and is expressed as a percentage of the loan amount. We’ll cover how it works, how it’s determined and calculated, and how you can save money by knowing how APRs work.

How APR works

APR represents the annual cost to borrow  money as a percentage of the loan amount. It applies to many different credit products, including mortgages, auto loans, personal loans, and credit cards. It differs from the interest rate alone because it also considers upfront fees, such as an origination fee or administration fee. For example, since credit card issuers don’t typically charge upfront fees, the interest rate and APR on credit cards may be interchangeable.

APR disclosures are designed to make it easier to see how much you'll pay for a loan or other credit, and to better choose how you want to borrow. For example, APR makes it easy to compare how much you’d pay to carry a balance on a credit card versus taking out a personal loan with an origination fee. 

What affects your APR?

The factors affecting your APR vary by loan type. For example, a credit card issuer may evaluate the following when determining your APR:

• Credit score: This gives an overall picture of the risk to lend to you.
• Payment history: Credit card issuers use this to judge how responsible you are with making payments on time.
• Debt-to-income ratio (DTI): DTI shows whether you’re already overextended with your debts.
• Type of card: You might pay a higher APR on a rewards card or a card designed for poor credit borrowers.

Personal loan lenders will ask for proof of income and employment as well, which may impact your rate. And the rate may also vary based on the term you choose, the amount you borrow, and what you plan to use the loan for.

When you apply for an auto loan or mortgage, lenders use even more criteria to evaluate you and determine your APR. For example, an auto lender will look at your down payment amount and the age of your car. Mortgage lenders consider even more criteria, including where the home is located and the type of mortgage you choose.

Interest rates, and therefore your APR, are also impacted by the prime rate, which is a rate set by banks that is based on the target federal funds rate. The Fed adjusts the federal funds rate in response to economic conditions. For example, when inflation is running high, the Fed may increase the target federal funds rate to slow down economic activity, making it more expensive for consumers and businesses to borrow.

How to find your APR

You can check your credit card statement or credit card agreement to find your credit card's APR. If you don’t have these documents available, you can also check your online account or call your credit card issuer and ask them to disclose your APR. For other loan types, you may also be able to check your statement or contact the lender directly.

Types of APR

The following are different types of APRs. Many, but not all, apply generally to credit cards.

Introductory APR

Some credit card issuers offer low or 0% initial APRs for new cardholders or on balance transfer offers. This rate may stay in effect for six to 21 months. Once the introductory APR period is over, you’ll begin paying the regular APR on the entire balance.

Purchase APR

This is the APR you’ll pay on credit card purchases after the grace period. If you pay off your balance on-time and in-full every month, you can avoid this APR.

Cash advance APR

If you need to borrow cash from your credit card issuer, you’ll likely pay a separate APR that is higher than your purchase APR. In addition, the balance will typically start accruing interest right away on any cash advances.

Penalty APR

If you violate the terms of your credit card agreement by paying late or missing a payment altogether, your credit card issuer may raise your APR temporarily. This is known as a penalty APR.

Fixed APR

A fixed APR generally stays the same over time, unless you violate your agreement. If your APR is fixed, your lender or credit card issuer must notify you of changes to your APR.

Variable APR

A variable APR fluctuates with the prime rate, so you may pay more to carry a balance in some months than others. Variable APRs are common with credit cards, and some types of mortgages and student loans.

How to calculate APR

The best way to calculate APR is with an APR calculator online, or with an amortization calculator. But, if you want to approximate the APR using a simple calculator like the one on your phone, you can use the formula below:

(Origination fee + total interest) / Amount borrowed / (Number of years in the loan) x 100

For example, let’s say you take out a personal loan for $20,000 with a term of seven years, an 8% interest rate, and a $200 origination fee.

Here’s how you would calculate the APR. First approximate the total interest on the loan. You’d do this by multiplying the annual interest rate of 8% by the loan amount and the number of years in the repayment term.

• $20,000 x .08 x 7 years = $11,200

Then, you add the origination fee to the interest amount and divide that by the amount borrowed.

• ($11,200 + $200) / $20,000 = 0.57

Finally, you divide that number by the number of years in the loan and multiply by 100.

• (0.57/7) x 100 = 8.14% APR

However, the true APR on this loan is actually around 8.32%. That’s because APR calculators account for compound interest over the course of the loan.

Note that credit card interest is calculated a little differently. Most credit card issuers use your average daily balance to calculate the interest you owe each day. As the interest is added to your balance, you’ll also pay interest on the interest you accrue.

How to save money on credit card interest

Here’s how you can save money on credit card interest.

• Pay your balance on time and in full: You can avoid paying any interest on your credit card debt if you pay off your full balance within the grace period.
• Avoid late or missed payments: If you can’t pay your balance in full, pay at least the minimum payment or more by your due date. This will help you avoid a penalty APR.
• Use the debt avalanche method: If you have multiple credit cards, the debt avalanche method can help you decide how much to pay on each card. You’ll still make at least the minimum payment on all cards, but you’ll allocate any extra money you have toward the card with the highest APR until it’s paid off.
• Make multiple payments per month: Since credit card issuers calculate the interest you owe daily, you’ll pay less in interest if you make a payment multiple times a month.
• Consolidate your debt: You can use a balance transfer card, personal loan, or another low-interest loan to pay off your credit card debt. After consolidation, you’ll be left with one monthly payment and a lower APR.
• Apply for a low-interest credit card: If you expect to carry a balance temporarily, applying for a 0% introductory APR credit card can give you a break from paying interest.
• Ask for help: If you think you’ll carry a balance indefinitely, work with a nonprofit credit counseling agency to set up a budget that is more manageable. Otherwise, credit card debt can get out of hand. Your credit counselor can also enroll you in a debt management plan to help you get a handle on your current debts.

FAQ

What is a good APR for a credit card?

The current average APR across credit card accounts is 21.19% as of August 2023, according to the Federal Reserve, so anything below that is relatively good. However, it’s possible to achieve an APR as low as 0% for a limited time if you take advantage of an introductory offer. On the other hand, you may pay a higher-than-average rate if you have bad credit or are just starting to build credit.

How does APR affect my monthly payments?

Your monthly payment for a loan is based on your loan amount, interest rate, and term, rather than your APR. APR is a way of looking at the total borrowing cost, including both interest and upfront fees.

In the case of a credit card, your minimum payment is calculated as a percentage of your statement balance plus interest and late fees, if any. Because your credit card APR is typically the same as your interest rate, a higher APR will mean a higher minimum monthly payment if you carry a balance.

Can APR change over time?

Yes. If you have a variable APR, it will change over time as the prime rate changes. Even if you have a fixed APR, it can change due to factors like late payments.

How does APR affect balance transfers?

Some credit card issuers may charge separate APRs for balance transfers and purchases. The higher the balance transfer APR, the more you’ll pay to carry the transferred balance on your new card. Many credit card issuers also offer a 0% APR on balance transfers for six to 21 months (after a balance transfer fee). After that, a regular variable APR will kick in.