What's the difference between APR and interest rate, and why is APR higher?

What's the difference between APR and interest rate?

You want to understand why APR and interest rate show different numbers on your loan paperwork, and why APR is typically higher. The interest rate is what the lender charges you to borrow money—this rate determines your monthly principal and interest payment. APR includes that same interest rate plus additional loan costs spread over the life of the loan, like origination fees, discount points, and some closing costs. APR gives you a fuller picture of what the loan actually costs beyond just the interest rate. APR appears higher because those extra costs get calculated as if they were additional interest charged over the loan term. A loan with a 6.5% interest rate might have a 6.75% APR once fees get factored in.

Check your Loan Estimate to see how your lender calculated both numbers—Section A shows the interest rate, and the APR appears prominently on page 1. The difference between the two numbers can help you compare loan offers from different lenders, since a loan with a slightly higher interest rate but lower fees might have a better APR than one with a lower rate but higher upfront costs.