How it works
The annual percentage rate spreads a loan's upfront finance charges over its term and expresses the total cost as a yearly rate. Lenders in the US must disclose it under the Truth in Lending Act, which makes it useful for comparing offers.
The calculation finds the rate at which your monthly payments exactly repay the amount you actually receive, after fees. Because fees reduce what you receive without reducing what you repay, the APR is higher than the note rate.
Fees have a bigger effect on APR for short loans, because they are spread over fewer payments. The APR assumes you keep the loan for its full term.
Formula
Solve for r: amount received = payment × (1 − (1 + r)^−n) ÷ r; APR = 12 × r
Questions people ask
What fees are included in APR?
Finance charges such as origination fees, discount points, and mortgage broker fees. Third-party costs like appraisal, title insurance and recording fees are generally excluded on mortgages.
Why is APR misleading if I refinance early?
APR spreads fees over the whole term. If you sell or refinance after a few years, the fees were spread over fewer payments and your real cost was higher than the APR suggests.
What is the difference between APR and APY?
APR is a simple annual rate. APY includes compounding within the year; for a loan this is the effective annual rate shown in the results.