Annual Percentage Rate (APR)Share

What Is Annual Percentage Rate (APR)

Annual Percentage Rate (APR) is the yearly interest rate charged for borrowing money or earned through an investment, expressed as a percentage of the principal amount. In traditional finance, APR often includes other costs associated with the loan or credit, such as origination fees, closing costs, or mortgage insurance.

How Is the Annual Percentage Rate Calculated

The formula for APR is:

APR = (Interest / Principal) × (365 / Days in term) × 100

Determine the total interest paid or earned over a specific period and divide it by the principal amount, which is the original sum of money invested or borrowed. Multiply the result by 100 to express it as a percentage. 

APR is useful for comparing the costs of loans or the returns on investments where compounding does not occur or when a simpler comparison is needed. 

Annual Percentage Rate (APR) vs. Annual Percentage Yield (APY)

It's important to distinguish Annual Percentage (APR) from Annual Percentage Yield (APY). APR represents the total yearly cost of borrowing money, while APY represents the total amount of money you earn in an investment, taking into account compound interest. Unlike APY, which includes the effects of compounding interest, APR represents the simple annual interest rate without factoring in compounding.