APR

APR, or annual percentage rate, is a standardized measure of the cost of borrowing money expressed as a yearly percentage. It is used for loans and credit to show the total yearly cost of financing, including interest and certain fees. The exact components and disclosure rules vary by country, but APR is generally intended to facilitate comparison across offers.

Calculation and interpretation: APR combines the stated interest rate with additional charges such as origination fees, points, and certain closing costs, spread over the loan term. Because it includes these costs, the APR can differ from the nominal interest rate. Some jurisdictions distinguish between nominal APR and the true or finance APR. For investments, the related concept is the annual percentage yield (APY) or effective annual rate (EAR), which accounts for compounding, whereas APR focuses on the cost of borrowing.

Applications and examples: APR is commonly shown for mortgages, auto loans, student loans, and credit cards. Lenders use APR to advertise and consumers use it to compare offers. In credit cards, the APR applies to carried balances, while promotional rates may temporarily reduce the APR. In mortgages and other loans, the APR can be affected by the structure of fees and the loan term.

Regulation and limitations: In the United States, the Truth in Lending Act and Regulation Z require clear APR disclosures for many consumer loans. In the European Union, the APRC (annual percentage rate of charge) serves a similar purpose. APR can be misleading if it omits non-financing fees, assumes a specific payment plan, or does not reflect future rate changes, so readers should examine the full payment schedule.