What is APR (Annual Percentage Rate)?

APR (Annual Percentage Rate) is the yearly cost of a US loan expressed as a percentage, including the nominal interest rate plus most mandatory fees such as origination, discount points, and mortgage insurance. It is the standard apples-to-apples comparison number that lenders must disclose under the Truth in Lending Act (Regulation Z).

Detailed definition

APR is a yearly cost-of-credit measure required by US federal law. Congress created the Truth in Lending Act (TILA) in 1968 to make loan offers comparable; the Federal Reserve and now the Consumer Financial Protection Bureau implement it through Regulation Z (12 CFR Part 1026). The rule defines the finance charge as everything the borrower pays the lender as a condition of credit, then re-expresses that finance charge as a yearly rate on the amount actually advanced. The result is the APR shown in the comparisons box of every Loan Estimate.

The mechanism matters. Interest is the price of the principal across time; APR is the price of the loan after closing costs are spread across the term. Two lenders can offer the same 6.50 percent note rate yet quote different APRs because one charges more origination, more points, or more mortgage insurance. The APR captures that gap in one number. The trade-off is that APR assumes you hold the loan for its full scheduled life. If you refinance or sell early you do not recover the points or origination, so the higher-rate, lower-fee loan can be cheaper in practice.

APR scope varies by product. On mortgages, APR includes origination, discount points, mortgage insurance, and prepaid interest. On installment loans (auto, personal), APR includes mandatory lender fees. On credit cards, there are no closing costs, so APR equals the interest rate; cards convert APR to a daily periodic rate (APR / 365) and apply it to the average daily balance. Adjustable-rate mortgages disclose a "fully indexed APR" assuming the index stays at its current value.

Formula

APR (closed-end loan)  = (Finance charge / Amount financed) x (365 / Loan term in days)
Daily periodic rate    = APR / 365            (credit cards, lines of credit)
Effective APR (APY)    = (1 + APR/n)^n - 1    (when compounding matters)

Finance charge = interest plus mandatory lender fees (origination, points, mortgage insurance, certain underwriting). Defined in 12 CFR 1026.4.
Amount financed = loan principal minus prepaid finance charges (12 CFR 1026.18(b)).
n = number of compounding periods per year. APR uses simple annualisation; APY uses compounded annualisation.
Daily periodic rate applied to credit cards uses 365 days; some commercial loans use a 360-day year (the "bankers' year").

Worked example (2026 conventional mortgage)

Suppose a US borrower takes a $400,000 30-year fixed conventional mortgage at a 6.50 percent note rate. The lender charges 1 percent origination ($4,000), one discount point ($4,000), and $300 of other lender-only fees. There is no mortgage insurance because LTV is 80 percent.

Loan amount: $400,000 at 6.50 percent for 360 months.
Monthly principal and interest: $2,528.27 (computed from the 6.50 percent note rate).
Total scheduled interest: $510,178 over 30 years.
Prepaid finance charges: $4,000 origination + $4,000 point + $300 fees = $8,300.
Amount financed: $400,000 minus $8,300 = $391,700.
APR: the rate that makes the present value of 360 payments of $2,528.27 equal $391,700. That rate is roughly 6.689 percent.

Result: 6.50 percent note rate becomes a 6.689 percent APR (about 19 basis points higher) once the $8,300 of upfront finance charges are rolled in. Two lenders quoting 6.50 percent can have very different APRs depending on origination and points.

APR vs interest rate vs APY

The three numbers are easy to confuse. APR is the standard for US loans; APY is the standard for US deposits; the interest rate alone is what drives the actual monthly payment.

Metric	What it includes	Used for	Required by
Interest rate (note rate)	Cost of principal only; no fees, no compounding adjustment	Calculating the monthly payment	Disclosed on the note; required to be shown
APR	Interest rate plus mandatory lender finance charges; no intra-year compounding	Comparing US loan offers (mortgages, auto, personal, credit cards)	Regulation Z (12 CFR 1026.22)
APY	Nominal rate plus the effect of compounding within the year	Comparing US deposit accounts (savings, CDs, money market)	Regulation DD (12 CFR 1030)

Related calculators on 3Tej

Plug your own note rate, loan amount, and lender fees into one of these free calculators to see your APR and the break-even on points:

APR Calculator APY Calculator Mortgage Calculator Loan Amortization Schedule Compound Interest Calculator

Frequently asked questions

What is the difference between APR and interest rate?

The interest rate is the cost of borrowing the principal alone, expressed as a yearly percentage. APR is broader: it adds in most mandatory closing costs (origination fees, discount points, mortgage insurance, certain underwriting fees) and re-expresses the total as a yearly rate. The monthly payment is computed from the interest rate, not the APR. On a typical 30-year fixed mortgage the APR runs roughly 0.10 to 0.30 points above the note rate.

What fees are included in APR?

Regulation Z requires lenders to include the finance charge in APR: interest, origination fees, discount points, mortgage insurance premiums, certain prepaid interest, and other costs the lender requires as a condition of credit. Excluded: appraisal, credit report, title insurance, escrow deposits, recording fees, and most third-party costs the borrower can shop for.

Is a lower APR always better?

Usually yes, but only over a similar holding period. A loan with discount points has a lower APR because the points are amortized across the full term. If you sell or refinance early you may never recoup those points, in which case the higher-rate, no-points loan is cheaper in practice. Compare lender Loan Estimates side by side and check the 5-year cost figure.

How is credit card APR different from mortgage APR?

Credit card APR is usually variable (Prime + a spread) and is applied daily to revolving balances using the daily periodic rate (APR divided by 365). There are no closing costs to roll in, so credit card APR equals the interest rate. Mortgage APR rolls upfront fees into one yearly number for a one-time, scheduled-payment loan.

What is APR vs APY?

APR (Annual Percentage Rate) is a nominal rate that ignores intra-year compounding. APY (Annual Percentage Yield) includes the effect of compounding within the year, so APY is always at least as large as APR. US lenders disclose APR for loans (Regulation Z); US banks disclose APY for deposits (Regulation DD). At a 6 percent APR compounded monthly the APY works out to 6.17 percent.

Does APR include closing costs?

It includes lender-required finance charges (origination, discount points, mortgage insurance) but not third-party closing costs the borrower can shop for (appraisal, title insurance, recording). On the federal Loan Estimate the APR appears in the comparisons box on page 3 and is usually 0.10 to 0.30 points above the stated note rate.

Sources and further reading

Consumer Financial Protection Bureau, 12 CFR 1026.22 - Determination of annual percentage rate.
Consumer Financial Protection Bureau, What is the difference between a mortgage interest rate and an APR?.
Federal Reserve, Regulation Z Commentary - Truth in Lending.
CFPB, Your Loan Estimate Explained - the disclosure that shows the APR.
Truth in Lending Act (15 USC 1601 et seq.) - statutory authority for APR disclosure.

Last updated 2026-05-28.