Loans & debt
Annual percentage rate (APR): Definition, Formula and Example
APR is an annualized measure of borrowing cost under a specified disclosure method; for many closed-end loans it includes specified finance charges as well as interest.
Scope: General borrowing concept with U.S. disclosure context; exact statutory APR depends on product and jurisdiction.
Other names and related labels: APR; Annualized borrowing cost.
How it works
Interest rate and APR need not be equal when points or other included charges reduce the borrower’s net proceeds. Legal inclusions and calculation methods depend on jurisdiction and credit product. Credit-card or HELOC APR is not necessarily comparable to a fee-inclusive closed-end mortgage APR.
Cash-flow illustration: net amount received = present value of the scheduled payments at the borrowing rate
Do not simply add a fee percentage to the interest rate. Payment timing and net proceeds matter; the illustration below is not a universal legal APR formula.
$10,000 borrowed with a $100 included upfront fee
Assume a single $11,000 repayment exactly one year later.
- Net proceeds: $10,000 − $100 = $9,900.
- One-year cash-flow rate: $11,000/$9,900 − 1 ≈ 11.1111%.
The simplified one-year cash-flow cost is about 11.1111%, although interest on the $10,000 face amount is 10%.
One annual payment and one assumed included finance charge; excludes other charges and special disclosure conventions.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
APR is not your total payment or the maximum adjustable rate
Taxes, insurance and some other costs may be outside APR. An adjustable-rate disclosure also does not guarantee the future rate path. Compare the term, included charges, repayment pattern and likely holding period.
Explore with a calculator
- APR Calculator
Estimate borrowing APR under the tool’s stated fee and timing assumptions.
- Personal Loan Calculator
Review net proceeds, fee treatment and payment amounts.
- Cash Back or Low Interest Calculator
Compare alternative financing offers over the same horizon.
- Business Loan Calculator
Separate financing fees from the face loan amount.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms