APR Explained in Plain English
Why a short loan's APR looks huge, how APR differs from an interest rate, and how to turn any APR into a dollar cost you can budget for.
What APR measures
APR stands for annual percentage rate. It's the yearly cost of borrowing, including interest and certain required fees, expressed as a percentage. Because every lender calculates it the same way under the federal Truth in Lending Act, APR lets you compare offers on one scale.
APR vs interest rate
The interest rate covers only interest. APR adds required fees such as an origination fee. If a loan has no fees, the two are the same. If it has fees, APR is higher, and it's the better number for comparison.
Why short loans show huge APRs
APR assumes you borrow for a full year. A two-week loan with a $15 fee per $100 borrowed doesn't sound expensive, but repeated 26 times a year it equals roughly 391% APR. The percentage is correct; it just describes a cost you might pay only once.
That's why you should also look at the finance charge in dollars. It tells you what this loan will actually take from your budget.
Turning APR into dollars
For fixed-payment loans, use the loan calculator. Enter the amount, APR, and term and it shows total interest and total repaid. For example, $1,500 at 35.99% over 12 months costs $308.23 in interest.
Three rules of thumb
- Compare offers with the same term; a lower APR over a longer term can still cost more in total
- Check the dollar finance charge, not only the percentage
- Ask whether early payoff reduces interest; on most installment loans it does
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