Which offer is cheaper
Credit card APR, day by day
The interest rate is what the lender charges on the balance. The APR is the rate once the cost of getting the loan is included, which is why it is the number the law makes lenders disclose and the only fair way to compare two offers.
What the law actually counts
The APR is built from the finance charge, defined in Regulation Z as the cost of consumer credit as a dollar amount: any charge payable by the borrower and imposed by the lender as a condition of the credit. That definition decides which fees are in and which are out, and it surprises people.
| In the APR | Not in the APR |
|---|---|
| Interest | Application fees charged to everyone |
| Discount points and loan fees | Title examination and title insurance |
| Origination and underwriting fees | Appraisal and inspection, on a mortgage |
| Mortgage broker fees, even if the lender does not keep them | Credit report fees, on a mortgage |
| Mortgage insurance: PMI, FHA MIP, the VA funding fee | Document preparation, notary, recording |
| Prepaid interest | Late fees and other charges for breaking the terms |
The awkward part is that appraisal and credit report fees are finance charges in general, but are excluded for loans secured by a home when they are bona fide and reasonable. That is why two lenders can quote different APRs on identical costs, and why the closing costs on a Loan Estimate do not all appear in the APR.
A quoted APR has a legal tolerance
A disclosed APR counts as accurate if it is within one eighth of a percentage point of the correct figure for a regular loan, or a quarter point for an irregular one. So a small difference between our number and a lender's is expected, and is not worth chasing. What matters is a gap between the rate and the APR, which tells you how much the fees cost.
APR is not APY
Borrowing uses APR: fees in, compounding out. Saving uses APY, which is defined in a different regulation as the yield including compounding, with no fees. This is why a savings account paying 5% monthly compounded advertises an APY slightly above 5%, while a loan at 5% with fees shows an APR above 5%. Different rules, opposite directions.
Cards work differently
On a credit card there are no origination fees to fold in, so the APR is simply the periodic rate multiplied by the number of periods in the year. Issuers charge interest daily, so the daily rate is the APR divided by 365. The box above turns your card's APR into the daily rate and the monthly cost.
Points: the question the APR cannot answer
Paying points buys a lower rate. The APR will usually favour the points, because it assumes you keep the loan for the whole term. Almost nobody does. The comparison above works out the break-even month instead: how long you need to keep the loan before the upfront cost is repaid by the lower payment. Keep it longer and the points win; move, sell or refinance sooner and they do not.
Quick answers
What is the difference between APR and interest rate?
The interest rate is charged on the balance. The APR also includes the fees you pay to get the loan, spread over the term, so it is usually higher and is the better number for comparing offers.
Which fees are included in the APR?
Interest, points, origination and underwriting fees, broker fees and mortgage insurance. Title, appraisal, credit report, notary and recording fees are excluded on a home loan.
How accurate does a disclosed APR have to be?
Within one eighth of a percentage point for a regular loan, or a quarter point for an irregular one, under 12 CFR 1026.22.
Is APR the same as APY?
No. APR is the cost of borrowing including fees but without compounding. APY is the yield on savings including compounding but without fees.
How do I work out the daily rate on a credit card?
Divide the APR by 365. At 22.15% that is 0.06068% a day, which is about $92 a month on a $5,000 balance.
Sources
- 12 CFR § 1026.4, the finance charge: what is included and excluded
- 12 CFR § 1026.22, APR accuracy and the one-eighth point tolerance; Appendix J, the actuarial method
- 12 CFR § 1026.14, how an APR is worked out on open-end credit such as cards
- 12 CFR § 1030.2 (Regulation DD), the definition of annual percentage yield
- CFPB, interest rate compared with APR