APR Calculator
Calculate the true Annual Percentage Rate (APR) of a loan including all fees and charges. APR provides a more accurate picture of borrowing costs than the interest rate alone, making it easier to compare different loan offers.
How to Use This APR Calculator
1. Enter the loan amount (principal) you plan to borrow.
2. Input the nominal interest rate (the advertised rate shown in loan offers).
3. Set the loan term in years or months depending on your loan type.
4. Enter all applicable fees including origination fees, discount points, and other closing costs.
5. Add any prepaid interest if applicable to your loan scenario.
6. Click "Calculate APR" to see the true annual cost of borrowing and compare it to the advertised rate.
What is APR (Annual Percentage Rate)?
Annual Percentage Rate (APR) is the total yearly cost of borrowing money, expressed as a percentage. Unlike the nominal interest rate, APR includes additional costs like origination fees, discount points, mortgage insurance, and other charges, giving you a more complete picture of what a loan will truly cost over its lifetime.
Federal law requires lenders to disclose the APR alongside the interest rate, making it easier for consumers to compare loan offers on equal footing. Two loans with identical interest rates can have very different APRs depending on their fee structures, which is why APR is considered a more accurate measure of borrowing costs.
- Interest Rate: The cost of borrowing the principal loan amount, expressed as a yearly percentage
- APR: The interest rate plus all fees and costs, spread over the loan term
- Key insight: The higher the fees, the greater the difference between the rate and APR
APR vs Interest Rate: Understanding the Difference
The interest rate is simply the cost of borrowing the principal amount. APR, however, factors in all the costs associated with the loan. For example, a mortgage with a 6.5% interest rate might have an APR of 6.8% after including origination fees, points, and closing costs. This 0.3% difference can represent thousands of dollars over a 30-year mortgage.
When comparing loan offers, always compare APRs rather than just interest rates. A loan with a lower interest rate but higher fees might actually cost you more than a loan with a slightly higher rate but lower fees. The APR reveals the true cost of each option.
Common Fees Included in APR
- Origination fees: Charged by the lender to process and underwrite the loan, typically 0.5% to 1% of the loan amount
- Discount points: Prepaid interest that lowers your rate - each point costs 1% of the loan and typically reduces the rate by 0.25%
- Mortgage broker fees: Compensation paid to brokers who help arrange the loan
- Closing costs: Various fees including appraisal, title insurance, and attorney fees
- Private mortgage insurance (PMI): Required for conventional loans with less than 20% down payment
APR Formula and Calculation
APR is calculated by finding the interest rate that, when applied to the loan amount minus fees, produces the same monthly payment as the nominal rate on the full loan amount. The simplified formula is:
APR = 2 x n x F / [P x (N + 1)] where F = Finance charges, P = Principal, n = Payments per year, N = Total payments.
This calculator uses a more precise iterative method (Newton-Raphson) to find the exact APR that accounts for all fees over the loan term, providing accurate results for any loan scenario.
When APR Matters Most
APR is most useful when comparing loans of the same type and term length. For mortgages you plan to keep for the full term, a lower APR almost always indicates a better deal. However, if you plan to refinance or sell within a few years, a loan with lower upfront fees might be better even if the APR is slightly higher, since you won't pay the fees over the full loan term.