Annual Percentage Rate (APR)

Annual percentage rate summary: 

• An annual percentage rate (APR) is your total cost of borrowing money each year, expressed as a percentage. 

• APRs help you compare your debt payoff options, such as continuing to make payments or pursuing debt consolidation or debt settlement.

• APR helps you compare loans with different pricing—for instance, a loan with a 10% rate and $500 in costs versus one with no costs but an 11% rate. 

Annual Percentage Rate Definition and Meaning

An annual percentage rate (APR) is your total cost of borrowing money each year, expressed as a percentage. For credit cards, the APR is often the same as your interest rate. However, the APR for loans includes the interest rate plus additional fees. 

Comparing APRs is helpful when you shop for a credit card or loan. It’s important to know what APRs you’re paying if you continue to pay your existing debt instead of exploring other options, like debt consolidation, debt settlement or bankruptcy. 

Types of APR

Your annual percentage rate (APR) will either be fixed (meaning it doesn’t change) or variable (meaning it fluctuates based on factors like market interest rates). Most loans have fixed APRs, though some loans (like adjustable-rate mortgages) have variable APRs. Almost all major credit cards have variable APRs.

Here are some other types of APRs you may encounter:

• Introductory APRs. Some credit cards offer a temporary low interest rate, often 0%. An introductory APR, also known as a promotional APR, may apply to new purchases, balance transfers from a different credit card, or both.

• Penalty APR. If you fall behind on your credit card payments by more than 60 days, a higher penalty APR may apply.

• Cash advance APR. If you use your credit card to withdraw cash from an ATM, you’ll usually pay a higher cash advance APR.

How Do Lenders Determine APR?

Your APR will depend on a number of factors, including:

• Type of credit. Loans generally have lower APRs than credit cards. Also, loans that are secured by collateral (like a car loan, where your vehicle is the collateral) tend to have lower APRs than unsecured debt.

• Credit history. Lenders and credit card companies consider your credit history and credit score in determining your APR. As you build credit and improve your score, you may qualify for a lower APR.

• Market interest rates. Changes in the national and global economy impact the cost of borrowing. You'll generally see rates increase when the economy is strong (leading to concerns about inflation) and fall when the economy slows.

• Lender. Interest rates and fees can vary significantly by lender. Make sure you compare APRs between lenders, since APR will give you the most accurate picture of the full cost of borrowing.

How to Use APR if You’re Dealing With Debt

When you pay a higher APR, more of your payment will go toward interest and fees, and less of your payment will go toward the principal balance. Comparing APRs of existing debts is helpful when you’re deciding what debts to prioritize. For example, you may decide to use the debt avalanche, where you focus on tackling the debt with the highest APR while making minimum payments on your other balances. Once you pay off the debt with the highest APR, you put all the money you were paying on that debt toward the debt with the next highest APR.

You can also use APR to decide whether to continue paying down credit cards or look at alternatives, such as taking out a debt consolidation loan.