What is an APR?

Nicole Madison
Nicole Madison

An APR or annual percentage rate is a numerical figure used to express the cost of credit. It is the yearly amount a consumer must pay for acquiring a loan or other type of credit. By law, lenders are required to fully disclose the APR to consumers.

Credit card companies offer varying APRs when issuing cards.
Credit card companies offer varying APRs when issuing cards.

The law that requires loan-cost disclosure is called the Truth in Lending Act. Originally enacted in 1968, the Truth in Lending Act was instituted as part of the Consumer Protection Act. In 1980, it was reformed and simplified as part of the Depository Institutions Deregulations and Monetary Control Act.

The intended function of the APR is to allow consumers to compare loans and determine which loans or other types of credit are the least costly. The APR serves to make it more difficult for lenders to hide fees while advertising low interest rates. Essentially, APRs level the very competitive loan market and help consumers make informed borrowing decisions.

While APRs can be used to compare loans and determine the least expensive credit products, they can also be confusing. Each lender may calculate APRs in a different way. Therefore, a loan with a lower APR may not necessarily be less costly than one with a higher APR.

Lenders are afforded some flexibility when it comes to calculating APRs. Without breaking the law, they can underestimate the annual percentage rate of a loan by as much as 1/8 of a percentage point. For loans that are considered irregular, lenders may underestimate APRs by as much as 1/4 of a percentage point.

To make things even more confusing, various fees are included in an APR. These fees vary, depending on the loan or credit product obtained. Points; prepaid interest; private mortgage insurance; and fees for loan processing, document preparation, and underwriting are commonly included in an APR. Sometimes loan application fees and credit-life insurance costs are included as well.

To avoid APR discrepancies when comparing credit costs, some loan experts suggest calculating APRs on your own. This can be accomplished by obtaining good-faith loan cost estimates from lenders offering the same loan programs or credit products at the same interest rates. After compiling this information, subtract all fee amounts that are independent of the loan and add these fees separately. The loan that has the lowest total fee amount is the cheapest loan. However, this method only works when comparing loans that have the same interest rates.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a wiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

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Discussion Comments


GreenWeaver-I know that Chase and Bank of America were starting to require their customers that hold high credit card balances to pay a higher percentage of their balance every month.

For example, most of the rates were about 2% of the balance that were set for the minimum payment. Now these banks are requiring the minimum to be upped to 5% and in some cases 10%. This does not seem like much, but on a balance of $25,000 it is significant.

But unlike a home equity line of credit that is secured, credit cards are unsecured and can be discharged in a bankruptcy. With a credit card balance, they can not take your home, but they can with a home equity line of credit.


Sunny27-I like the rewards cards too, but they actually make you spend more. It is proven that people who use credit cards spend more than those that pay cash.

The reason is simple. When you pay cash you have a finite amount of money, not an endless supply. However, when you pay with a credit card, you feel like you can spend more because of your credit limit.

This is why many department stores offer you discounts when you open a charge card. They know that once you get their card you will charge a lot more than you probably will admit to.

This is why so many people have filed for bankruptcy because spending with a credit card is so easy and if you are not careful and miss a payment, the APR calculator will skyrocket and you will have to pay two to three times as much in order to make a dent in the bill.


Oasis11- Bankrate provides information in the best APR cards. If you do not carry a balance and pay your credit cards at the end of the month, then the rewards cards might be worth it.

I know that the APR Audi and the APR VW cards offer points that can be used towards the purchase of a new Audi or Volkswagen.

I love the rewards cards and I do pay my balance at the end of the month so I don’t have to worry about the APR calculation.

I have a GM card that offers me like 5% off of all purchases. If you save your points for a few years you will be able to put a down payment on your GM car with no effort.

I had a friend that had a Disney card, and they were able to go to Disneyland and pay for the tickets for a whole week with the points they had accumulated.

I personally love the APR credit cards that offer rewards because it gives you something to look forward to.


Anon43309- Those rates usually go to a handful of people. An APR is the annual percentage yield or the annual compounded interest rate you will be charged.

It is important to note the APR credit card rates because many are set a 20% or higher. Pay special attention to the credit cards that offer rewards points of some kind.

These credit cards offer a higher APR calculation than a non reward card because this is how the bank offsets its payments for the rewards.

A better idea is to obtain the lowest possible APR card available if you usually carry credit card balances.

You can check out the site called Bankrate which offers the APR credit interest rates for nationwide banks.


I finally get what 0 percent APR is on the car commercials. haha

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