What is annual percentage rate vs interest rate

August 18, 2022 |8 min read

August 18, 2022 |8 min read


Whenever you’re shopping for credit, the annual percentage rate (APR) and the interest rate are likely to play an important role in your decision. But what’s the difference when it comes to APR versus interest rate?

Both terms represent the cost of borrowing money. But they aren’t exactly the same thing. And understanding the differences when comparing APRs versus interest rates can help you make a more informed decision when you’re shopping for credit. Read on to learn more about the two terms, how interest rates and APRs are determined and calculated, and which one you should pay attention to when you’re comparison shopping. 

Key Takeaways 

  • An interest rate is the price you pay to borrow money. It’s usually shown as a percentage, and it’s charged on the principal loan amount.
  • The APR is a broader measure of borrowing costs. It can include the interest rate plus other costs, such as transaction fees and discount points. 
  • Lenders may use different factors to determine your interest rate. Credit history, down payment amount, loan type and loan term are common factors. 
  • For credit cards, APR and interest rate are typically the same amount. APRs are generally higher than interest rates for other types of loans, such as mortgages and car loans. 

What Is APR?

If you have ever taken out a loan or applied for a low interest credit card, you’ve likely encountered the term “APR.” APR stands for annual percentage rate. And as the Consumer Financial Protection Bureau (CFPB) explains, “APR is a broader measure of the cost of borrowing money.” That’s because APR includes not only the interest rate but some other costs too—like lender fees, closing costs and insurance.

Keep in mind that the interest rate and the APR may be the same for a credit card. But that may not be the case with all loans, so it’s important to understand the difference.

Consider a mortgage, for example. As the CFPB explains, when it comes to a mortgage, “The APR reflects the interest rate, any points, mortgage broker fees and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.”

What Is an Interest Rate?

An interest rate represents the cost of borrowing money from a lender, according to the CFPB. An interest rate is expressed as a percentage and is charged on the principal loan amount. For a credit card, that loan amount would be the card balance.

What’s the Difference Between APR and Interest Rate?

Unlike the APR, an interest rate shows only the amount of money it costs to borrow the principal loan amount. APR gives you a bigger picture of a loan’s costs because it includes the interest rate plus any additional fees. 

APR fees can vary depending on the lender, the loan type and your credit history. In addition to the interest rate, the APR can include origination fees, which are the fees associated with processing a new loan application. APR could also include transaction fees, brokerage fees and other charges. 

There are a few things to keep in mind when you compare APR versus interest rate:

  • Interest rates don’t include additional fees. This is why the APR is typically higher than the interest rate. 
  • If the APR is the same amount as the interest rate, this could mean the lender isn’t charging additional fees.
  • A lender could advertise a low interest rate, but the loan may have a high APR. That’s why it’s important to review both rates when you’re loan shopping. 
  • Some loans and credit cards may give you an introductory offer, like 0% interest or APR. Once the promotional period ends, the interest rate or APR might increase.  
  • Comparing APRs and loan terms can help you estimate monthly payments and find the best option for your financial situation.

How Are APRs and Interest Rates Determined?

How APRs and interest rates are determined depends on the type of credit or loan.

Your interest rate and APR may be determined by a variety of factors such as credit scores, loan type, down payment amount and loan terms. 

When it comes to credit cards, your issuer may decide which interest rate or APR to charge you based on information in your application and your credit history, according to the CFPB. Generally, the higher your credit scores, the lower your interest rate or APR might be.

That’s true when it comes to loans too. But lenders might take even more factors into account, including things like the down payment and loan term. For example, the higher the down payment, the lower the interest rate or APR might be.

Variable vs. Non-Variable Rates

APRs or interest rates can either be variable or non-variable. A variable rate is often based on an index—like the prime rate—that lenders use to set their own interest rates. And a variable rate could change when the prime rate changes.

A non-variable rate typically stays the same, but it can change under certain circumstances. For example, your non-variable rate could increase if you make late payments or miss payments. But it depends on your lender’s policies and your card or loan terms.

How Are APRs and Interest Rates Calculated?

Lenders use their own formulas to determine how much interest you’ll pay. Some lenders may use the simple interest method, while others could use an amortization schedule. Lenders may also factor in your credit scores, the loan amount and loan type to determine your interest rate and APR. 

For credit cards, the interest can be calculated daily or monthly, depending on the card. “Many issuers calculate the interest you owe daily, based on the average daily balance,” the CFPB explains.

If that’s the case with your card, your issuer might track your balance day by day, adding charges and subtracting payments as they’re made. All those daily balances are added together at the end of the billing cycle. Then, the total is divided by the number of days in the billing cycle to calculate your average daily balance.

Keep in mind that credit card issuers may charge one rate for purchases and different rates for other types of transactions, like balance transfers and cash advances.

An APR calculation may depend on the type of credit or loan. Mortgage APRs, for example, include discount points, fees and other charges in their calculations. 

The full explanation of how your issuer calculates interest will be disclosed in your card’s terms and conditions. And you can learn more about credit card APRs by checking out this deep dive into how credit card APRs are calculated.

Should You Look at Interest Rates or APRs to Compare Credit Offers?

When you’re comparing credit offers, whether you should look at the interest rates or the APRs depends on the type of credit or loan you’re applying for.

For credit cards, interest rate and APR can be used interchangeably when comparing offers. But pay attention to whether the rate is variable or non-variable, since a variable rate can change.

And keep this from the CFPB in mind: “On most cards, you can avoid paying interest on purchases if you pay your balance in full each month by the due date.”

When it comes to mortgages and other types of loans, comparing APRs may be the most helpful, since APRs include not only the interest but other costs too. And subtracting a mortgage’s interest rate from the APR can give you an idea of how much a lender’s fees will cost you.

When comparing loan offers, it also helps to compare other factors—not just the interest rates or the APRs. Some factors to consider include things like the annual fees, required down payments and loan terms.

APR vs. Interest Rate in a Nutshell

Remember: The APR and the interest rate both represent the cost of borrowing money. And they’re both expressed as a percentage. For credit cards, the interest rate and the APR are usually the same. But when it comes to other loans, the APR can more accurately reflect the cost of borrowing. Now that you know the differences when it comes to APR versus interest rate, you can make a more informed decision when you’re shopping for credit.


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We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

August 18, 2022 |8 min read

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Is the annual percentage rate higher than the interest rate?

Your Annual Percentage Rate is typically higher than your interest rate because it includes your interest rate plus certain fees, such as lender and mortgage broker fees, based on the specific characteristics of your loan.

Is it better to have a lower interest rate or APR?

APR is the cost to borrow money, so a lower APR is better for a borrower compared to a higher APR.

Is annual interest rate the same as rate of return?

While both rate of return and interest rate are expressed as percentages, a return rate is based on investments made while interest is paid on a loan.

What do you mean by annual percentage rate?

Annual percentage rate (APR) refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.