Loans & debt

Annual percentage rate (APR): Definition, Formula and Example

APR is an annualized measure of borrowing cost under a specified disclosure method; for many closed-end loans it includes specified finance charges as well as interest.

Scope: General borrowing concept with U.S. disclosure context; exact statutory APR depends on product and jurisdiction.

Other names and related labels: APR; Annualized borrowing cost.

How it works

Interest rate and APR need not be equal when points or other included charges reduce the borrower’s net proceeds. Legal inclusions and calculation methods depend on jurisdiction and credit product. Credit-card or HELOC APR is not necessarily comparable to a fee-inclusive closed-end mortgage APR.

Cash-flow illustration: net amount received = present value of the scheduled payments at the borrowing rate

Do not simply add a fee percentage to the interest rate. Payment timing and net proceeds matter; the illustration below is not a universal legal APR formula.

$10,000 borrowed with a $100 included upfront fee

Assume a single $11,000 repayment exactly one year later.

  1. Net proceeds: $10,000 − $100 = $9,900.
  2. One-year cash-flow rate: $11,000/$9,900 − 1 ≈ 11.1111%.

The simplified one-year cash-flow cost is about 11.1111%, although interest on the $10,000 face amount is 10%.

One annual payment and one assumed included finance charge; excludes other charges and special disclosure conventions.

The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.

APR is not your total payment or the maximum adjustable rate

Taxes, insurance and some other costs may be outside APR. An adjustable-rate disclosure also does not guarantee the future rate path. Compare the term, included charges, repayment pattern and likely holding period.

Explore with a calculator

Sources and checks

Calculation methodology and review status · All glossary terms