How Is APR Calculated?

💸 APR sounds complicated — but it’s just the real cost of borrowing, explained in one number.

Whether you’re applying for a credit card, a loan, or financing a new car, you’ve probably come across the term APR. But what does it actually mean — and how is it calculated?

We’ve also included a calculator to make things easy.

Let’s break it down in plain English.

🙋‍♀️ What Is APR?

APR stands for Annual Percentage Rate — the yearly cost of borrowing money, shown as a percentage.

It includes:

• The interest rate
• Plus fees and other costs

This makes APR more helpful than just looking at the interest rate alone, especially when you’re comparing lenders.

🧮 APR Formula

Here’s a simplified version of the formula:

APR = [(Interest + Fees) / Loan Amount] ÷ Loan Term in Years × 100

Where:

• Interest = total interest paid over the loan
• Fees = any one-time loan fees (like origination or processing fees)
• Loan Amount = how much you borrowed
• Loan Term = in years

The result gives you the true annual cost of the loan, as a percentage of the amount borrowed.

📋 Example: Personal Loan APR

Let’s say:

• You borrow $10,000
• You pay $1,200 in total interest over 1 year
• You paid a $100 processing fee

Here’s how it works:

APR = [($1,200 + $100) / $10,000] ÷ 1 × 100
APR = (1,300 / 10,000) × 100 = 13%

✅ Your APR is 13%

🧠 APR vs Interest Rate

• Interest rate is just the base charge for borrowing money
• APR includes that and any extra costs or fees
• That’s why APR is a more accurate way to compare loans or credit cards

🧾 Where You’ll See APR

• Credit card applications
• Auto loans and leases
• Mortgages
• Personal or student loans

Lenders are required by law to show you the APR, not just the interest rate, so you can make an informed decision.

✅ Quick Tips

• A lower APR usually means a better deal
• Always check if fees are included — they can raise your APR
• Use APR calculators when comparing loan offers
• Be careful with “0% APR” promos — they often jump after the promo ends