Legal Glossary
Interest Rate / APR
The interest rate is the annual cost of borrowing money; APR (Annual Percentage Rate) is the total yearly cost including fees.
Legal Definition
The interest rate is the annual percentage of the principal that a lender charges for the use of borrowed money, expressed as a percentage of the outstanding balance. The Annual Percentage Rate (APR) is a broader measure that includes the interest rate plus other loan costs — origination fees, points, broker fees, mortgage insurance, and other charges — expressed as a single annual percentage. APR enables apples-to-apples comparison between loan offers that may have different fee structures. By law (Truth in Lending Act in the U.S.), lenders must disclose APR alongside the interest rate on consumer loan offers.
In Plain English
The interest rate tells you what it costs to borrow the money itself. The APR tells you what the loan actually costs in total, per year, after you account for all the fees associated with getting it. A loan with a 6% interest rate and $3,000 in origination fees on a $100,000 loan might have an APR of 6.4% — the APR reflects the true cost after the fees are factored in. When comparing loan offers, always compare APRs, not just interest rates. A loan with a lower interest rate but high origination fees may be more expensive than a loan with a slightly higher rate but lower fees — the APR reveals this.
Real-World Example
Lisa is comparing two personal loan offers: Lender A offers 8% interest rate with a $500 origination fee on a $10,000 loan. Lender B offers 8.5% interest rate with no fees. Lender A's APR (after factoring in the $500 fee) works out to about 9.1%. Lender B's APR is 8.5% (no fees to add). Despite Lender A's lower stated interest rate, Lender B is actually the cheaper loan — something only visible when comparing APRs.