The Difference Between Interest Rate and APR

(Video Transcript)

When you’re applying for a new credit card or loan, you’ll see both the interest rate and annual percentage rate, or APR. That might leave you wondering, “What’s the difference?”

The interest rate is the cost of borrowing. The APR includes the interest rate plus other costs and fees. This could include fees for loan processing, underwriting, or document preparation. Let’s look at an example.

Say you go to two different banks, and they both offer a 4.00% interest rate. Bank A has a 4.20% APR. Bank B has a 4.75% APR. This means the second bank has higher costs and fees for the loan or credit card.

Banks are required to quote the APR on all lending products. So next time you’re comparing costs for a loan or credit card, be sure to compare the APR before choosing a final product.