Annual Percentage Rate Definition

The Annual Percentage Rate, or APR, is the annualized rate of interest charged for a loan or debt. It includes all costs and fees, and is expressed as a single figure. The APR may vary significantly from the advertised interest rate. In most cases, the APR is required to be advertised alongside the interest rate. This APR requirement is intended to allow a potential borrower to quickly and accurately gauge the true cost of a loan or borrowing money.

For example, a personal loan for $1000 might be advertised at a rate of 10%, giving the appearance that it would cost only $100 per year. In addition, however, the loan has processing and servicing fees amounting to an additional $240 per year. Thus, the actual cost of the loan would be $340 per year, for an APR of 34%. Each state has a cap (or limit) for the annual percentage rate that may be charged on various types of debt. These caps are typically referred to as usury laws.

The important points to remember are these: 1) Never borrow money without knowing all of the costs associated with the loan, credit card, mortgage, etc. 2) Be sure to compare financing offers based upon the annual percentage rate because it contains all of the costs you will incur when taking out a loan.