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What is APR? A Complete Guide

When you borrow money with your credit card or a personal loan, you repay your lender the amount you borrowed and an additional amount based on your annual percentage rate (APR), and many may ask, “What is APR?” 

As part of healthy financial management, it’s important to understand APR’s significance. Car loans, mortgages, credit cards, and personal loans all have an annual percentage rate, and everyone should be aware of how it affects their finances.

What is Annual Percentage Rate (APR)? 

APR refers to the yearly rate a lender charges on a loan, including interest and fees. The APR incorporates the total sum of interest and other additional fees like closing cost, and it is shown as a percentage. It may also include other information, such as late fees or prepayment penalties.  

The annual percentage rate encompasses the interest rate, but lenders may present them separately when they offer loans. The APR’s main purpose is to provide transparency, showing you the interest rate and other fees involved in obtaining a loan.  

A businesswoman shaking hands to complete a deal.

How does APR work on a loan? 

Examples of loans can be mortgages, personal loans, or home equity financing. The APR works by determining how the cost of additional fees is spread across the length of your loan term. It’s presented as a percentage and reflects how much you pay per year. 

The importance of knowing APR

When you know the annual percentage rate on your loans, you see how much everything will cost, but the APR doesn’t usually represent your monthly payments. 

The APR presents the overall cost, helping you compare between different lenders and develop a financial plan. Some lenders have high APRs but offer reasonable monthly payments. Since you know your financial situation best and how you want to approach repaying the loan, you can determine whether the interest and fees are within your budget. 

Types of APRs 

There are quite a few different types of APRs, but only two are applicable to loans. 

  • Variable APR— this means the interest rate on the loan can vary based on the prime rate, even if your monthly payment may remain the same.  
  • Fixed APR—being the opposite of variable, having fixed APR means that the rate doesn’t change with fluctuating market conditions. 

Annual percentage rate vs mortgage rate 

Mortgage rates are similar to interest rates and can be fixed or variable. The interest rate on your mortgage loan depends on the economic condition, the lender’s requirements, and possibly your credit score. 

When you need a loan to buy a piece of property, you apply for a mortgage loan from a lender. As with all loans, it comes with an interest rate expressed as a percentage. The mortgage rate functions like the interest rate and is the additional cost of using a mortgage loan to buy a house. It does not include the additional payments.   

In the context of mortgages, APR shows how much the mortgage loan costs as a whole, totaling the cost of your interest rate and other charges. The APR will most likely appear higher than the mortgage rate you’re offered because it considers broker fees and closing costs.

APR vs APY 

Though they are presented as percentages, APY and APR are different; one of their key differences is that APY involves compounding interest, whereas APR does not.  

Annual percentage yield (APY) is commonly found in investing, while APR is used more for loans and credit cards. APR represents the overall additional borrowing cost, including interest rates and other lending fees.

APR  APY 
  • Represents total cost of interest rate and additional fees when borrowing 
  • Does not include compounding 
  • Often used for credit cards and loans 
  • Used for comparing rates and loan offers 
  • Represents compounded earnings 
  • Often used for investments 
  • Can be used for comparing potential investment returns  

APR and relationships with loans 

APR reflects the total costs of a loan, but total costs are different in every scenario. 

Unsecured personal loans 

The loan with often the highest APR range is personal unsecured loans. Their rates can range from 20% to 40%, depending on your credit score and loan amount.  

Getting approved for an unsecured loan from traditional lenders requires a good credit score, steady income, and employment. If your credit score doesn’t meet their requirements, you still have a chance of approval, but the APR may not be ideal. 

Other personal loans may not have the same requirements, but the lowest rate they can offer you is likely higher than the one you have on your credit card.  

Home equity loans 

The annual percentage rate on home equity loans includes the additional fees but is comparatively lower than credit cards and unsecured loans. They can range anywhere from 12%-16% at alternative lenders, but lenders normally offer a fixed rate to give borrowers a predictable payment schedule.  

If you have built a significant amount of equity, you are eligible to get approved for one. You don’t have to provide your employment or income history; you only need to show how much equity you have in your home. 

Changing your APR before getting a loan 

Depending on the lender and your financial situation, you can change your APR to a more ideal and lower rate.  

  • Negotiate with your lender—before you completely agree to an offer, you may be able to negotiate a lower interest rate or closing fees and, therefore, a lower APR than your first offer. Some lenders will be willing to accommodate. 
  • Raise your credit score—those with higher credit scores receive better interest rate offers. You can increase your score by paying off more of your outstanding balances.  
  • Apply for a secured loan—if you provide collateral for a loan, the APR will most likely be lower than unsecured loans and credit cards. An example of a secured loan is a home equity loan from Alpine Credits. 

How is APR calculated on a home equity loan? 

Determining APR involves a detailed equation; most people calculate their APR using a calculator. The APR on home equity loans uses the same equation. 

APR= (interest + fees) divided by loan amount divided by loan term days x 365 x 100

Interest in the APR calculation is not the same as the interest rate. You can find how much your loan’s interest is worth by using a different calculation.  

Interest = (rate x loan term years) x principal amount

The result is what you add to the fees in the APR equation. You can also add the interest to the principal amount to see how much you are paying the lender.  

APR and home equity loan example 

You can determine the total cost of your home equity loan from the information your lender provides. For a two-year term with an interest rate of 15% for a loan worth $100,000, you can determine how much you’ll be paying.

Interest = (0.15 x 2) x 100,000

Interest = 30,000

The total of your loan is then $130,000. Once you have determined how much interest your loan will have, you can move forward with calculating the APR. For this example, the fees are a total of $1350. Additionally, two years in days is a total of 730 days.

APR =(30,000 + 1350) divided by 100,000 divided by 730 x 365 x 100

APR = 16.1%


With this particular home equity loan example, APR is greater than the interest rate as it incorporates additional fees on the loan.

Home equity loans with Alpine Credits 

If you’re a homeowner who has built a significant amount of equity in your property, you are eligible for a home equity loan from Alpine Credits. Home equity loans are a great financial tool for achieving goals like home renovation, loan consolidation, and business investments. At Alpine Credits, our APRs and interest rates are comparatively lower than those of credit cards and other unsecured loans.  

  1. Apply online—the application only takes a few minutes. You only need to provide your personal details and home appraisal value rather than your credit history or income.  
  2. Wait for results—Alpine Credits processes applications faster than other lenders. You’ll get the approval for your loan within a few days.  
  3. Receive financing—after you get approved, the money will be deposited into your bank account. You can use the funds for the purpose you want.  

As long as you own at least 25% of your home, you’re eligible for a home equity loan from Alpine Credits, regardless of your income, credit score, or employment status. You have an important financial tool in your home, and we can help you access it.   

If you have more questions about home equity loans and APRs, contact a Financial Solutions Specialist at Alpine Credits. They are experts who can advise and guide you through the application when you’re ready to complete it.

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Frequently asked questions

The main difference between APR and interest rate is that APRs include the total cost of the loan, which consists of the interest. In the context of home equity loans and mortgages, APRs include closing costs and origination fees.

Loans and credit cards have different annual percentage rates. Credit cards normally have interest rates at around 20% and above, while loans have a wider range, depending on the kind of loan. Unsecured personal loans can have high APRs, while traditional loans and secured loans can have APRs that are less than credit cards. Overall, a good APR is the lowest possible within your specific financial situation.  

If people with less-than-ideal credit scores are approved for a loan, the lowest possible interest rate the lender could offer is likely relatively high.