APR (Annual Percentage Rate)
Definition
The yearly cost of borrowing expressed as a percentage, including interest and certain fees, used as the standard comparison rate for loans, credit cards, and mortgages.
APR represents the cost of borrowing money over one year, expressed as a percentage. For loans and credit cards, APR includes not just the interest rate but also certain fees (origination fees, closing costs for mortgages), giving a more complete picture of the true borrowing cost.
The Truth in Lending Act (TILA) requires lenders to disclose APR, making it the standard metric for comparing loan products. A mortgage with a 6.5% interest rate but high closing costs might have a 6.8% APR, while one with a 6.7% rate and low fees might have a 6.75% APR — the second option is actually cheaper despite the higher stated rate.
Credit card APR works differently from loan APR. Credit card APR applies to balances carried from month to month and typically compounds daily. A card with 24% APR charges about 0.066% per day on outstanding balances. If you pay your statement balance in full each month, you pay no interest regardless of the APR.
Variable APR changes with an index rate (usually the prime rate, which follows the Federal Reserve's rate decisions). Most credit cards have variable APR. Fixed APR stays the same for the loan's term, common for personal loans, auto loans, and some mortgages.
Understanding APR is essential for debt management. Paying off high-APR debt (credit cards at 20%+) should almost always take priority over investing, since the guaranteed "return" from eliminating 20% interest exceeds expected investment returns.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Why is my credit card APR so high?
Credit cards are unsecured debt (no collateral), which carries higher risk for lenders. The average credit card APR is around 22-24%. If you carry a balance, the effective cost is very high. The best strategy is to pay the full statement balance each month to avoid interest entirely.
Is a lower APR always better for a mortgage?
Not necessarily — a lower interest rate might come with higher closing costs or points, resulting in a higher APR. Compare the APR across mortgage offers to see the true all-in cost. Also consider how long you plan to stay in the home, as points may not be worth it for a short stay.