Annual Percentage Rate (APR): What It Is and How It Works

The annual percentage rate is the total cost of borrowing money, encompassing the annual interest rate you’ll pay on a loan plus fees. APR can be fixed or variable and depends on the type of credit you’re using. For example, the APR on a credit card tends to be higher than the APR on a personal loan.

As you assess loan options, reviewing APR can give you a true comparison of how much a loan costs across lenders. Looking only at interest rates may not paint the whole picture since fees are only considered in the APR.

It’s important to note that, for certain loans or lines of credit, the APR and the interest rate will be the same, as is often the case with credit cards. However, certain loans will have an interest rate with a slightly higher APR. For example, a $50,000 personal loan with an interest rate of 8% and origination fees of $1,500 has an APR of 8.58%, slightly higher than the interest rate.

The way APR is calculated depends on the type of loan. The APR on a personal loan will have different inputs compared to the APR on a mortgage or car loan. Regardless of loan type, lenders generally use the following inputs in calculating the APR:

• Interest rate
• Loan balance
• Number of days in the loan term
• Fees

If you have the loan's interest rate and fees, you can calculate the APR yourself using an APR calculator. Before you sign the contract for a loan, the lender is legally obligated to disclose the APR, thanks to the Truth in Lending Act.*

Types of APR

For certain types of credit, there is more than one APR. Common types of APR include:

• Promotional APR: Some credit cards or other loans have an introductory APR where you may get a set number of months with a 0% APR. This promotional period can save you money if you can repay the balance due before it ends.
• Purchase APR: When you make purchases using a credit card, the purchase APR is the rate that applies to the balance on purchases if you fail to pay back what’s due on time.
• Cash Advance APR: A cash advance APR is the rate you pay if you use a credit card to withdraw cash from your card. It is typically higher than your purchase APR.

Fixed vs. Variable APR

APRs can be either fixed, meaning the interest rate and fees don’t change over the life of the loan, or variable, meaning the APR can rise or fall based on broader economic conditions, like the prime rate as set by the Federal Reserve. Credit cards are an example of financing with a variable APR, while many personal loans have fixed rates.

There are several steps you can take to increase your chances of qualifying for a low APR loan:

• Improve your credit score: Many lenders consider your credit score when deciding whether to issue a loan, so having the strongest credit score possible may help you get a better rate. Making payments on time and in full and keeping your overall credit utilization at less than 30% are effective ways to boost your score. While it may take time to improve your credit score, steady progress is key and can lead to significant savings in the long run.
• Keep your Debt-to-Income (DTI) Ratio down: Your DTI ratio measures what percentage of your monthly income goes toward debt payments . A ratio of less than 30-35% typically indicates to lenders that you’re able to handle more debt.
• Opt for a shorter repayment term: Longer repayment terms are riskier for a lender, so sometimes, choosing a shorter term can work in your favor. However, keep in mind that shorter terms often mean higher monthly payments, so you’ll want to check your budget to confirm you can afford it before you commit.
• Look for a loan with no origination fees: Some lenders don’t charge origination fees, which can bring down the APR closer to the interest rate. However, you’ll want to compare interest rates, too, to ensure the lender isn’t just shifting the cost of fees into a higher rate.

BHG Financial offers personal loans up to $250,000¹ with repayment terms of up to 10 years^1,2 and fixed, low APRs. All of this adds up to affordable monthly payments. Whether you're looking to consolidate high-interest credit card debt or add value to your home with improvements, we're committed to creating a financial solution that works for you. Get started online by checking your rate.

Can you avoid paying APR on a loan?

You may be able to avoid paying interest on certain loans by paying the balance due on time and in full. For example, you can avoid paying a credit card APR by ensuring you pay the full balance due by the due date.

What is a good percentage of APR on a loan?

What’s considered a good APR depends on the type of loan, your credit score, and other factors. Borrowers with higher credit scores typically qualify for the most favorable APR on loans.

What is the difference between APR and APY?

APR is used to convey the interest and fees you’ll pay on debt, whereas annual percentage yield (APY) is used to show the earnings on an interest-bearing account like a savings account.