How APR is calculated
Example: a $20,000 personal loan at 7% for 5 years has a payment of $396.02. If a $500 origination fee comes out of the loan, you only receive $19,500 but still make $396.02 payments. The rate that makes 60 payments of $396.02 repay $19,500 is 8.07% APR. Total interest is $3,761.44, and with the fee the loan costs $4,261.44.
There's no simple formula for the last step, so the calculator searches for the rate, the same way lenders and spreadsheet RATE functions do.
APR vs. interest rate
The interest rate sets your payment. The APR adds the cost of fees, points and some closing costs, spread over the loan's life, so it's always at least as high as the rate. Under the federal Truth in Lending Act, lenders must show the APR, which makes it the best single number for comparing offers with different fees.
APR assumes you keep the loan for its full term. If you'll sell or refinance early, upfront fees cost more per year than the APR shows, so a lower-fee loan with a slightly higher rate can come out ahead. For credit cards, which have no upfront fees, the APR and interest rate are the same.
Frequently asked questions
What is a good APR for a personal loan?
It depends on your credit. Borrowers with excellent credit often see APRs under 10%, while fair credit can mean 20% or more. Compare APRs rather than rates when offers have different fees.
Why is APR higher than the interest rate?
Because it includes fees. You repay the full loan amount with interest but receive less than that once fees are taken out, so the true yearly cost is higher.
Is APR the same as APY?
No. APR is used for borrowing and doesn't compound. APY is used for savings and includes compounding, so the same rate shows a slightly higher APY.
Was this calculator helpful?