Why the interest rate is not the whole story
Two personal loans at 9% can cost very different amounts if one charges an origination fee. The annual percentage rate (APR) folds those upfront fees into a single yearly rate, so offers can be compared fairly. Under the Truth in Lending Act, US lenders must disclose it; this calculator lets you check it yourself.
How APR is calculated
- The monthly payment is set by the loan amount, the interest rate and the term.
- Fees are deducted upfront (or paid at signing), so you effectively receive less cash than the amount you repay interest on.
- APR is the rate at which the present value of all your payments equals the cash you actually receive. The calculator finds it by iteration, the same way lenders do.
Worked example: $20,000 over 48 months
The interest rate is 9% and the lender charges an $800 origination fee (4%).
- Monthly payment: $497.70.
- Total interest: $3,890.
- Cash you receive: 20,000 − 800 = $19,200.
- APR: 11.16%, more than two points above the advertised rate.
- Total cost of borrowing, interest plus fee: $4,690.
How fees move the APR
| Upfront fees | APR | Total cost of borrowing |
|---|---|---|
| $0 | 9.00% | $3,890 |
| $200 | 9.53% | $4,090 |
| $500 | 10.33% | $4,390 |
| $800 | 11.16% | $4,690 |
| $1,200 | 12.28% | $5,090 |
| $2,000 | 14.64% | $5,890 |
Fees weigh more on short loans: the same $800 spread over 12 months would add far more to the APR than over 10 years.
What counts in the APR
- Included: origination fees, discount points, some broker fees and required mortgage insurance premiums.
- Usually excluded: late fees, optional insurance, and for mortgages, items such as appraisal, title and recording fees.
Because exclusions differ, compare the full loan estimate, not only the APR, when shopping for a mortgage.
Comparing loan offers
- Use APR to compare loans with the same term. A longer loan may have a lower APR and still cost more in total interest.
- Ask whether the fee is deducted from the proceeds. If you need exactly $20,000, borrow enough to cover the fee, which raises the cost again.
- Check for prepayment penalties. If you plan to repay early, a no-fee loan with a slightly higher rate can be cheaper.
- Credit unions and online lenders often charge no origination fee; credit score has the biggest effect on the rate you are offered.
APR vs APY
APR does not include compounding within the year. For savings, banks quote APY, which does. Use the APY calculator to convert between the two.