What is APR, and how is it different from the interest rate?

6 October 2026 · Calcosmo editorial team

The annual percentage rate (APR) expresses the yearly cost of borrowing as a percentage, including the interest rate and most required fees. It is the fairest way to compare loans with different fee structures. Calculate payments with the loan calculator.

Why APR matters

Two loans with the same interest rate can cost different amounts if one lender charges an origination fee and the other doesn’t. APR rolls those fees into a single rate. In the US, the Truth in Lending Act requires lenders to disclose the APR; in the UK and EU, lenders must show a comparable figure (the representative APR or, in the EU, the annual percentage rate of charge).

APR vs interest rate vs effective rate

• Interest rate: the rate used to calculate the interest on your balance.
• APR (US style): the interest rate plus fees, expressed as a nominal yearly rate: monthly rate × 12. 8% APR means 0.667% per month.
• Effective annual rate (EAR/APY): includes compounding within the year. 0.667% per month equals 8.30% effective per year.

In the EU, including the Netherlands, the quoted rate (JKP) is an effective rate. That is why the calculator lets you choose between “nominal APR” and “effective annual rate”.

Worked example

You borrow $10,000 over 60 months at 8% APR. The monthly payment is $202.76 and total interest $2,166. If the same 8% were an effective annual rate, the payment would be $201.43 and the interest $2,086. Small difference here, but it grows with larger amounts and higher rates.

How fees change the APR

Suppose a lender charges a 5% origination fee on a $10,000 loan at 8% interest over 5 years, deducting $500 from the amount you receive. You still repay $202.76 a month, but you only got $9,500. The APR on that loan is about 10.2%, much higher than the advertised interest rate. Always compare APRs, not interest rates.

See more examples in the monthly payment on a $10,000 loan.

What APR doesn’t tell you

• Term: a lower APR over a much longer term can still cost more in total.
• Variable rates: credit card and some loan APRs can change.
• Optional extras: payment protection insurance is not always included.
• Mortgages: for home loans, APR includes points and some closing costs, which makes comparing loans with different points easier.