APR stands for annual percentage rate—which probably doesn’t really clear anything up for you. So let’s break down what APR actually means.
APR is a way of talking about the total cost of a loan over one year, hence the “annual” in the acronym. Of course, when we talk about loan costs, most people’s minds immediately jump to interest.
Let’s get that out of the way: APR is not just a fancy synonym for your interest rate, or even your annual interest rate, though that’s an easy mistake to make. The interest rate is just one part (but a very important part) of APR. The rest? Other fees and charges.
In fact, the whole point of APR is that it’s a more accurate way to talk about loan cost than the interest rate alone. APR takes into account things like origination fees, processing fees, closing costs, and packaging fees—anything that adds to the total amount you’re paying for your loan. When you’re looking at APR as a percentage, like 7%, it’s basically telling you that over one year, you’ll pay 7% of your loan amount (principal) in interest and fees.
So if you want to see the true cost of borrowing money, whether through a loan or credit, you need APR.