Quick answer
APR (annual percentage rate) is the cost of credit expressed as a yearly rate[1]. It combines the interest rate with certain fees charged when the loan is made, such as origination charges, so you can compare loans on one number[2].
Key points
- APR is a borrowing measure; savings accounts use APY instead.
- It includes the interest rate plus certain upfront fees, so it is usually higher than the plain interest rate.
- On US credit cards, APR is the periodic rate times the number of periods and does not include compounding.
On this page
#What does APR include?
US Regulation Z defines the annual percentage rate as a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of what the borrower receives to the amount and timing of the payments[1]. The Consumer Financial Protection Bureau puts it more simply: the APR is the interest rate plus additional fees charged by the lender, such as origination charges[2]. Because fees are folded in, two loans with the same interest rate can show different APRs.
#How is APR calculated on a credit card?
For credit cards and other open-end credit, Regulation Z says the APR is computed by multiplying the periodic rate by the number of periods in a year[3]. A 2% monthly rate becomes a 24% APR. That makes cards easy to compare, but if you carry a balance and interest is added to it, you pay interest on interest, so the real yearly cost is higher than the APR. Our full guide APR vs APY explained works through that in numbers.
Worked example
Example
A card balance of $1,000 at a 24% APR. Computed with code; real cards often charge a daily rate.
- Monthly rate: 24% ÷ 12
- 2%, about $20.00 interest for one month
- Daily rate: 24% ÷ 365
- about 0.0658% a day, about $19.73 over 30 days
#What is a representative APR?
In the UK, adverts for credit often show a representative APR. Under the FCA Handbook, it is a rate at or below which the firm expects at least 51% of the agreements resulting from the advert to be made[4]. So almost half of successful applicants may get a higher rate, often depending on their credit score.
#How is APR different from APY?
APR is what borrowing costs; APY, the annual percentage yield, is what savings earn once compounding is counted. Use APR to compare loans and cards, and APY to compare savings accounts. You can test the conversion with the APR to APY converter.
Frequently asked questions
Is a lower APR always better?
For the same loan amount and term, yes: a lower APR means a lower cost of credit, since it already includes certain fees[2].
Does a 0% APR mean the loan is free?
Only if you meet every condition. Late fees, or a higher rate after a promotional period, can still apply, as with some buy now, pay later plans.
Sources
- 12 CFR 1026.22 — Determination of annual percentage rate — eCFR (US Code of Federal Regulations), 2026 Primary
- What is the difference between a loan interest rate and the APR? — Consumer Financial Protection Bureau, 2026 Primary
- 12 CFR 1026.14 — Determination of annual percentage rate (open-end credit) — eCFR (US Code of Federal Regulations), 2026 Primary
- FCA Handbook Glossary: representative APR — Financial Conduct Authority Primary
.jpg){kind=link}
