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What Is an Annual Percentage Rate (APR)?

Learn about the Annual Percentage Rate, also known as the APR, in this Howcast video with expert Gregory McGraime.

Transcript

APR stands for annual percentage rate, and it's really a way of taking a fee that's associated with a loan and converting it to an interest rate. So let me explain, because most times when you're borrowing, there's some interest rate and then there's some fee for the loan that you're paying. And you see this all the time with mortgages.

But one of the challenging things is it can often times be hard to compare a mortgage from one place with a mortgage from the other. So let me give you an example. Let's say I'm borrowing $200,000 for a mortgage and the interest rate on that mortgage is 5%. The APR would often be above 5% because it's expressing the fee I'm paying for the mortgage as an interest rate that I'm paying. So instead of a simple 5%, the APR might be 5.5% because it's taking the fee and expressing it as an interest rate.

Now how does this help you? This helps you because let's say I'm shopping for mortgages and one bank tells me they can do 5% and another bank tells me they can do 5.25%, but they each have different fee structures or closing costs associated with them. What I want to know is what is the APR at Bank A? And let me compare it to the APR at Bank B, and I want to choose the loan that has the lower APR, assuming all things are considered equal.

So APR allows me to compare what seemed like apples and oranges in a consistent fashion. And so I can say the APR at one bank is 5.4 and at the other bank it's 5.25, and it's showing me all the fees included as expressed as that interest rate. So I think it's a really helpful tool, and it's also important to note not just what interest rate you're paying is, but what the APR is. Because a lot of times people get a loan and it might have a lower interest rate up front, but the APR might be actually a lot higher, meaning there are a lot of extra fees that you may not have understood involved in the loan. So always make sure you compare the APR to the basic interest rate as a way of seeing how expensive it is to get that loan.

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