How APR works, and why it matters more than the fee
APR turns the cost of credit into one annual percentage so you can compare offers more fairly. Read it alongside the finance charge and total of payments.
What APR actually measures
APR is the cost of credit expressed as an annual percentage. It takes the interest, certain fees, the amount borrowed and the repayment schedule, and converts all of it into one comparable number.
The reason that matters is simple: lenders can present cost in whatever way flatters the product. A flat fee sounds small. A monthly rate sounds moderate. A weekly payment sounds manageable. APR strips the presentation away and leaves the arithmetic.
The three numbers to look at together
- APR — lets you compare offers of different lengths and sizes
- Finance charge — the dollar cost of credit on this specific loan
- Total of payments — everything you will pay, assuming nothing is missed
The Truth in Lending Act requires all three to be disclosed in writing before you sign. If you have not been shown them, do not sign.
Why APR looks so high on small loans
A short-term loan with a flat monthly rate produces a large annual figure, because APR annualises. A rate that sounds moderate per month becomes a startling number per year.
That is not an accounting quirk designed to make short-term lending look bad. It reflects a real cost: holding that money for a year at that rate genuinely would cost that much. What it does mean is that APR alone can mislead in the other direction too — a two-week loan with a high APR may cost fewer dollars than a twelve-month loan with a lower one, simply because you hold it briefly.
This is why the honest approach is to read APR and total of payments together. APR tells you the rate you are paying. The total tells you what leaves your pocket.
Comparing two offers properly
- Write down the APR, the finance charge and the total of payments for each offer.
- Compare the totals first. That is the money.
- Use APR to check whether the cheaper total is cheaper because of a better rate or just a shorter term.
- Factor in whether you can actually meet the payment on the shorter term. A loan you default on is the most expensive one.
Our calculator shows all of these side by side, and lets you watch the total climb as you lengthen the term.
Common questions
Is a lower APR always better?
Usually, but not automatically. A longer loan at a lower APR can still cost more in total than a short one at a higher APR. Read APR and total of payments together.
Why is short-term credit APR in the hundreds?
Because APR annualises a rate charged over weeks or months. It reflects genuine cost, but it also means a brief loan can show a high APR while costing fewer dollars than a longer one.
Does APR include fees?
It includes interest and certain fees, though not every charge. Your finance charge and total of payments capture the full dollar picture.
Where do I find my APR?
It must be disclosed in writing before you sign, under the Truth in Lending Act. It appears in your Loan Agreement.
Related pages
Want to see it on real numbers?
Run your amount through the calculator and watch what the term does to the total.