APR Calculator
Uncover the true annual percentage rate of any loan. See how fees and points increase your effective borrowing cost beyond the stated interest rate.
What Is APR and Why Does It Matter?
The Annual Percentage Rate (APR) is the true cost of borrowing money, expressed as a yearly rate. Unlike the simple interest rate, APR includes all mandatory fees and costs associated with obtaining a loan — origination fees, discount points, mortgage insurance, and other closing costs. This makes APR the most accurate way to compare loan offers from different lenders, because two loans with the same interest rate can have vastly different APRs depending on their fee structures.
Federal law (the Truth in Lending Act, or TILA) requires lenders to disclose the APR on every loan offer. This regulation exists specifically to protect consumers from hidden costs and to ensure meaningful comparison shopping. When you see a lender advertising a low interest rate, always ask about the APR — the gap between the two numbers reveals the true fee burden of that loan.
How APR Is Calculated
APR calculation is more complex than simply adding fees to the interest rate. Our calculator uses Newton's method, an iterative numerical approach that finds the rate at which the present value of all loan payments equals the net loan proceeds (loan amount minus fees). This is the same method lenders and regulators use to compute APR.
Here's the intuition: imagine you borrow $250,000 but pay $7,450 in upfront fees. You only receive $242,550 in actual cash, yet you repay based on the full $250,000. The APR is the interest rate that would produce the same monthly payment on a $242,550 loan — effectively spreading those fees across every payment for comparison purposes.
Understanding the Components
APR includes several cost categories. Origination fees are charged by lenders for processing the loan and typically range from 0.5% to 1.5% of the loan amount. Discount points are prepaid interest — each point equals 1% of the loan amount and typically reduces your rate by 0.25%. Other fees may include application fees, underwriting charges, document preparation fees, and certain closing costs. Not all closing costs are included in APR (for example, title insurance and appraisal fees are sometimes excluded depending on the loan type).
Rate vs. APR: A Real-World Example
Consider two mortgage offers for a $300,000 loan over 30 years. Lender A offers 6.25% with $6,000 in fees, while Lender B offers 6.5% with only $1,500 in fees. At first glance, Lender A looks better. But when you calculate APR, Lender A comes in at approximately 6.45% while Lender B is around 6.58%. The gap narrows significantly — and if you plan to sell or refinance within 5-7 years, Lender B might actually save you money because those fees on Lender A are amortized over fewer years.
When APR Comparisons Fall Short
While APR is invaluable for comparing similar loans, it has limitations. APR assumes you'll keep the loan for its full term, which rarely happens — the average mortgage is held for only 7-10 years. APR also doesn't account for the time value of money (paying fees upfront costs more in real terms than paying them gradually). For adjustable-rate mortgages, the initial APR may be misleading since it's based on the introductory rate. Always consider your expected holding period alongside APR when making loan decisions.
Frequently Asked Questions
The interest rate is the cost of borrowing the principal loan amount, expressed as a percentage. APR includes the interest rate plus all mandatory fees and costs (origination fees, points, certain closing costs), giving you the total annual cost of the loan. APR is always equal to or higher than the interest rate. The bigger the gap, the more fees you're paying.
APR is higher because it incorporates all the fees and costs of obtaining the loan, not just the interest charges. Think of it this way: if you borrow $100,000 at 6% but pay $3,000 in fees, you effectively only received $97,000. The APR reflects the true rate you're paying on the money you actually received. More fees = bigger gap between rate and APR.
Not necessarily. APR assumes you'll keep the loan for its entire term. If you plan to sell your home or refinance within a few years, a loan with a lower rate but higher fees (lower monthly payment but higher APR) might cost more than a loan with slightly higher rate but minimal fees. Consider your holding period: the shorter it is, the more important low upfront fees become relative to the rate.
For mortgages, APR typically includes: origination fees, discount points, mortgage broker fees, and certain closing costs like underwriting fees. It generally excludes: title insurance, appraisal fees, credit report fees, and home inspection costs. For personal loans and auto loans, APR usually includes origination fees and any prepaid finance charges. The specific inclusions vary by loan type and lender.
Newton's method is an iterative algorithm that finds the APR by solving for the rate where the present value of all payments equals the net loan proceeds (loan minus fees). Starting with the stated rate as an initial guess, it refines the estimate by computing the derivative of the present value function at each step, converging on the true APR in just a few iterations. It's the industry-standard method for precise APR computation.
This calculator is for educational purposes only. Results are estimates and should not be considered financial advice. Actual APR may vary based on lender terms and specific fee structures. Consult a qualified financial advisor for personalized guidance.