Annual Percentage Rate - APR
Definition of 'Annual Percentage Rate - APR'
The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.
Investopedia explains 'Annual Percentage Rate - APR'
Loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors. A standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders.
By law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed to advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card company might charge 1% a month, but the APR is 1% x 12 months = 12%. This differs from annual percentage yield, which also takes compound interest into account.