APR (Annual Percentage Rate)
The annualized cost of borrowing, including the fees a headline rate leaves out.
APR folds the interest rate and any mandatory fees into a single annualized figure. That is what makes two loans comparable when one of them front-loads its cost into origination fees instead of the rate.
A $5,000 balance at 24% accrues roughly $1,200 a year, close to $100 a month, before a dollar of principal moves. Card interest compounds daily on the average balance, so the effective annual cost sits a little above the quoted APR.
The savings-side equivalent is APY, which already has compounding built in. Comparing an APR against an APY is not quite like for like, and the gap between the two widens as rates rise.
Worked through
Sarah, 29
Carries a $5,000 credit card balance at 24% APR and makes minimum payments.
- Balance
- $5,000
- APR
- 24%
- Monthly Interest
- $100
- Annual Cost
- $1,200
Interest alone runs near $100 a month at this balance and rate, before any principal is repaid.
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