How APR is calculated
First the monthly payment is found from the loan amount, interest rate, and term using the standard amortization formula. APR is then the rate that makes that stream of payments equal the cash you actually receive — the loan amount minus fees:
Loan − Fees = Monthly payment × present-value factor at the APR
On a $200,000 loan at 6% for 30 years with $4,000 in fees, the payment is about $1,199, but because you net only $196,000 the APR works out to roughly 6.18% — higher than the 6% rate.
Why APR matters
Lenders can advertise a low interest rate while charging hefty fees. APR rolls those fees into a single yearly figure, so comparing the APR of two offers is the fairest way to see which loan is truly cheaper. For payment and amortization detail, see the mortgage calculator and auto loan calculator.
Frequently asked questions
What is APR?
APR (annual percentage rate) is the yearly cost of a loan expressed as a percentage, including not just interest but also fees like origination charges and points. Because it folds in those fees, APR is usually higher than the quoted interest rate and is a fairer way to compare loans.
What is the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal alone. APR adds the loan's mandatory fees on top and re-expresses the total as a yearly rate. Two loans with the same interest rate can have very different APRs if one charges more in fees.
How is APR calculated?
First the monthly payment is worked out from the loan amount, interest rate, and term. Then APR is the rate that makes those payments equal the amount you actually receive — the loan minus its fees. This calculator solves for that rate numerically.
Why is my APR higher than my interest rate?
Because fees reduce the cash you actually get while you still repay the full loan amount. Spreading those fees across the payments raises the effective rate. The more you pay in fees, the larger the gap between your interest rate and your APR.
Does a shorter loan term change the APR?
Yes. The same dollar of fees is spread over fewer payments on a short loan, so it weighs more heavily and pushes the APR up. On a long loan the fees are diluted across many payments, narrowing the gap between APR and the interest rate.
Disclaimer: APR here assumes all fees are financed and the loan runs to term. Real APR disclosures vary by loan type and regulation. This is an estimate for educational purposes only and is not financial advice.