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If you’ve ever taken out a loan or opened a credit card, you’ve likely seen the term Annual Percentage Rate or APR. While this might seem like a fancy way of saying “interest rate,” they aren’t always the same.

In the credit context, an interest rate is the amount a financial institution charges to use the funds they are offering you. (It’s also the amount you might receive for keeping your money in a savings account or Certificate of Deposit (CD), but we’ll just be looking at it from a lending perspective.)

APR, on the other hand, can include both the interest rate and any additional fees associated with borrowing from that lender that are financed with the loan. Like interest rates, APR is reported as a percentage and, as the name implies, is used to show borrowers the total annual cost of borrowing.

From credit cards to mortgages, what APR includes and how it’s calculated will vary. Let’s take a look.

APR and Installment Accounts

Installment accounts are loans that are paid off over a set period of time in regular payments (or installments). While the APR doesn’t necessarily change the monthly payment on the loan, it does show the total cost of borrowing, making it easier to compare different loans and lenders.

Say, for instance, you’re shopping around for a mortgage loan. If one lender is offering a lower interest rate, it could be easy to see that as the better deal. However, the lender with the lower interest rate could also be charging higher upfront fees that make it a costlier loan overall, especially if those fees are rolled into your total amount financed.  

Here are a few fees that may be included when calculating APR, depending on the type of loan.

Mortgages

Interest rate PLUS:

  • Origination fees
  • Discount points paid
  • Broker fees
  • Any additional costs to finance your loan

[Try out this mortgage APR calculator to see how it works.]

Auto Loans

Interest rate PLUS: 

  • Origination fees
  • Any additional costs to finance your loan

Personal Loans

Interest rate PLUS: 

  • Origination fees

(Note: Origination fees are the amount charged by the lender in order to process your loan.)

APR and Revolving Accounts

For revolving accounts — a line of credit that can be borrowed from repeatedly up to a certain limit –– the APR and interest rate are generally one in the same. Fees associated with these types of accounts are typically not included in the APR calculation because they are considered optional and will only apply under certain circumstances.  

However, when it comes to credit cards, you might notice you don’t have just one APR. Here are a few you might see. 

  • Introductory APR
    A promotional rate offered to new card holders. This rate can apply towards new purchases, balance transfers, or both, and is usually applied for a set number of months. After the introductory period, interest will be applied to the remaining balance.
  • Purchase APR
    The APR applied to new purchases, unless the entire balance is paid within the card’s grace period (if the card has one). This is generally 21 days from the end of the last billing cycle to when the payment is due.
  • Balance Transfer APR
    The APR applied to a balance transferred from another card. Often a credit card company will have an introductory balance transfer APR of as little as 0%. Once this period is over, usually a higher balance transfer APR will apply to the remaining balance.
  • Cash Advance APR
    The APR applied to the cash you take from your credit card. This APR is generally higher and, without a grace period, interest often accrues daily.
  • Penalty APR
    When you are at least 60 days late on your credit card payment, a penalty APR will usually kick in (unless you have spoken to your credit card company about payment deferment). This will likely be higher than your original purchase APR and may expire after 6 months –– if you continue to make on-time payments.

How Credit Card APR Is Calculated

APR and interest rates are ordinarily one in the same when it comes to credit cards, but the actual calculation of what you owe isn’t quite so straightforward. 

Let’s start with two facts you should  know. 

  1. You may not have to pay interest at all if you pay the balance due before your credit card’s grace period is up — generally 21-25 days between when the bill is issued and when the payment is due. (Not all credit cards have a grace period, however.)
  2. If you do pay interest, it’s often calculated on a daily basis (known as your daily periodic rate), not an annual basis like the term APR suggests. By calculating the daily rate, you can determine what you will actually pay (if you carry a balance).

Step 1: Take your APR and divide that by 365. This is your daily periodic rate (DPR). 

Step 2: Multiply that number by the amount subject to interest (the balance you don’t pay during your credit card’s grace period, if it has one).

Step 3: Multiply by the number of days in your billing cycle. This is what you will accrue in interest.

Fixed vs. Variable 

Whether you’re in the market for a mortgage or a new credit card, there’s another  important factor to pay attention to: whether the APR is fixed or variable. 

If the rate is fixed, unless you default, the rate should remain the same for the length of the loan or a certain amount of time as agreed upon with the lender. Fixed rate credit cards would also have an interest rate that would remain the same — although, according to Bankrate, this type of card is getting harder and harder to find.

A variable APR, as you might have guessed, can change over time. For a mortgage, this would be called a  variable rate or “floating” mortgage. There’s also Adjustable Rate Mortgages (ARMs), which are mortgages that typically apply a fixed interest rate for a specified period of time, and then after that time period, the interest rate becomes variable. Because the rate tends to initially be lower than a comparable fixed rate mortgage, an ARM can be an attractive option. When the rate is adjusted based on then-current market rates, however, you could see a significant increase in your monthly payment. 

A change in APR for a variable credit card can be triggered by a change based on the prime rate — the interest rate commercial banks tend to charge their most credit-worthy customers. If the prime rate changes, chances are your rate will too.

The bottom line? Make sure you know upfront whether your rate is variable or fixed to avoid any surprises later on.

[Comparing credit card offers? Read this first. Thinking about getting a loan? Start here.]