Interest rate measures the cost applied to principal
The stated interest rate is used to calculate interest on the outstanding loan balance. It helps determine the scheduled principal-and-interest payment, but it may not reflect origination charges, points, or other costs paid to obtain the loan.
APR adds certain costs to a broader comparison
APR expresses the interest rate and certain finance charges as an annualized percentage. Which charges are included depends on the product and disclosure rules, so APR should come from the lender's official disclosure rather than a homemade rate conversion.
Compare offers on matching terms
APR is most useful when offers have comparable amounts, terms, and product features. Also review whether a rate can change, how fees are paid, any balloon payment or prepayment term, and the total of payments. A lower payment created by a longer term can still produce a higher total cost.
Example: a lower rate with higher fees
One offer can advertise a lower interest rate yet show a higher APR because of upfront lender charges. Another can have a slightly higher rate but fewer charges. Use each lender's official APR and dollar disclosures to compare the complete offers; do not infer the better loan from the interest rate alone.
What to check before you decide
- Use the lender's Loan Estimate, contract, or other official disclosure for the actual APR and included charges.
- Do not compare APRs from materially different loan types or terms as though every other condition were equal.
Sources behind this guide
These official and primary sources let you verify rules, definitions, and terms that may change.
CFPB — Interest rate and APR↗CFPB — Mortgage interest rate and APR↗CFPB — Compare auto loan offers↗