Interest Rate vs. APR Calculator
Discover the true cost of a loan. The Annual Percentage Rate (APR) is often higher than the advertised interest rate because it includes lender fees.
Enter your loan details below to calculate your APR, monthly payment, and the total cost over the life of the loan. This helps you compare loan offers more accurately.
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Understanding APR vs. Interest Rate
What is the Difference?
The Interest Rate is the percentage used to calculate the interest charged on the loan amount (principal). The Annual Percentage Rate (APR) is a broader measure of cost. It includes the interest rate PLUS other charges and fees, such as origination fees, closing costs, and points. The APR gives you a more complete picture of the yearly cost of your loan.
Monthly Payment Formula (Amortization)
Your monthly payment is calculated using the loan amount (P), the monthly interest rate (i), and the number of payments (n):
M = P * [ i(1 + i)^n ] / [ (1 + i)^n - 1 ]
Where: P = Principal Loan Amount, i = Monthly Interest Rate (Annual Rate / 12), n = Number of Months (Term in Years * 12).
How is APR Calculated?
Calculating the precise APR is complex. It's the interest rate that makes the present value of all your monthly payments equal to the net amount you received (Loan Amount - Fees). There is no simple, direct formula. This calculator uses a numerical method (iterative rate-finding) to solve for the APR, which is the standard method required by regulations like the U.S. Truth in Lending Act.
10 Loan Calculation Examples
Click on an example to see how fees impact the APR and total cost.
Example 1: Standard Mortgage
Scenario: A $300,000 home loan at 6.5% interest over 30 years, with $5,000 in closing costs.
Inputs: Loan=$300,000, Rate=6.5%, Term=30 yrs, Fees=$5,000
Result: The APR will be slightly higher than 6.5% (approx. 6.68%) because the fees are spread over the loan term. The monthly payment is $1,896.20.
Example 2: Auto Loan
Scenario: A $25,000 car loan at 7% over 5 years, with a $250 documentation fee.
Inputs: Loan=$25,000, Rate=7%, Term=5 yrs, Fees=$250
Result: APR is approx. 7.41%. Even a small fee has a noticeable impact on a shorter-term loan. Monthly payment is $495.05.
Example 3: Personal Loan with High Fees
Scenario: A $10,000 personal loan at 12% over 3 years, with a 5% origination fee ($500).
Inputs: Loan=$10,000, Rate=12%, Term=3 yrs, Fees=$500
Result: APR jumps to approx. 15.48%. High upfront fees significantly increase the true cost of borrowing. Monthly payment is $332.14.
Example 4: "Zero Fee" Loan
Scenario: A $50,000 loan at 8% over 10 years with no fees.
Inputs: Loan=$50,000, Rate=8%, Term=10 yrs, Fees=$0
Result: The APR is exactly 8.000%. When there are no fees, the APR equals the interest rate.
Example 5: Short-Term Loan
Scenario: A $2,000 loan at 15% for 1 year, with a $100 fee.
Inputs: Loan=$2,000, Rate=15%, Term=1 yr, Fees=$100
Result: APR is a very high 25.49%. Fees have a much larger impact on the APR for short-term loans.
Example 6: Large Commercial Loan
Scenario: A $1,000,000 loan at 7.5% over 20 years with $15,000 in fees.
Inputs: Loan=$1,000,000, Rate=7.5%, Term=20 yrs, Fees=$15,000
Result: The APR is 7.668%. While the fee amount is large, it's a small percentage of the total loan, so the APR impact is moderate.
Example 7: Refinancing a Mortgage
Scenario: Refinancing a $200,000 balance at 5.5% over 15 years, with $3,500 in new closing costs.
Inputs: Loan=$200,000, Rate=5.5%, Term=15 yrs, Fees=$3,500
Result: The APR is 5.761%. This tool helps determine if refinancing is worth the cost.
Example 8: Home Equity Loan
Scenario: A $75,000 home equity loan at 9% for 10 years with a $1,000 origination fee.
Inputs: Loan=$75,000, Rate=9%, Term=10 yrs, Fees=$1,000
Result: The APR is 9.259%.
Example 9: Small Loan, Modest Fee
Scenario: A $5,000 loan at 10% for 2 years with a $75 application fee.
Inputs: Loan=$5,000, Rate=10%, Term=2 yrs, Fees=$75
Result: The APR is 11.411%.
Example 10: Interest-Only vs. Amortizing
Note: This calculator is for amortizing loans (where you pay both principal and interest). For an interest-only loan, the APR calculation is different. This tool shows why comparing an amortizing loan's APR to an interest-only loan's rate can be misleading.
10 Frequently Asked Questions about APR
1. What does APR stand for?
APR stands for Annual Percentage Rate. It represents the total annual cost of borrowing money, including interest and fees, expressed as a percentage.
2. Why is APR a better comparison tool than interest rate?
Because it standardizes the cost. A loan with a lower interest rate but higher fees could be more expensive than a loan with a slightly higher rate but no fees. The APR reveals the true, all-in cost, allowing for an apples-to-apples comparison.
3. What kinds of fees are included in APR?
Common fees include loan origination fees, closing costs, mortgage broker fees, discount points, and other administrative charges paid to the lender. It typically does not include third-party fees like appraisals or title insurance.
4. Is a lower APR always the better choice?
Usually, yes. However, you should also consider the loan structure. For example, a loan with a slightly higher APR but more flexible payment options might be better for your situation. But for comparing identical loan types, lower APR is generally better.
5. When is the APR the same as the interest rate?
The APR and interest rate are the same only when there are zero lender fees associated with the loan.
6. Does this calculator work for credit cards?
No. Credit card APRs are calculated differently and often have variable rates and different fee structures (like annual fees or cash advance fees) not covered by this tool. This calculator is designed for fixed-rate installment loans like mortgages, auto loans, and personal loans.
7. Why do fees have a bigger impact on the APR for short-term loans?
Because the cost of the fees is spread over a shorter period. A $1,000 fee on a 30-year loan has a small annual impact. The same $1,000 fee on a 2-year loan has a much larger annual impact, significantly increasing the APR.
8. What is a "good" APR?
A "good" APR is relative and depends on the type of loan, current market conditions, and your credit score. The best way to know is to get quotes from multiple lenders and compare their APR offers.
9. What is the difference between APR and APY?
APR (Annual Percentage Rate) applies to borrowing money. APY (Annual Percentage Yield) applies to saving or investing money. APY accounts for the effect of compound interest, while APR accounts for the cost of fees.
10. Where can I find the fees for my loan?
Lenders are required by law (like the Truth in Lending Act in the US) to provide you with a Loan Estimate or similar disclosure document that clearly lists all fees and the calculated APR.
