A smiling man with glasses studies his interest rates while sitting in front of his laptop.

APR vs. Interest Rate

4 min read

Last Updated: March 27, 2025

Table of contents

Key Takeaways

An interest rate is a percentage charged on a principal loan amount that shows the cost of borrowing.
The terms "annual percentage rate" (APR) and "interest rate" are usually the same for credit cards. For loans, the APR includes both interest and other expenses.
When you understand the difference between interest rates and APRs you can make informed choices about loans and mortgages.

A credit card’s annual percentage rate (APR) and interest rate are often the same. However, understanding the difference between APR and interest rate could save you money over the terms of your other loans. A loan’s interest rate is an integral part of its APR. However, the formula for a loan APR includes additional fees and charges. The more you know about the differences between interest rates and APRs for credit cards and loans, the better you can manage your financial life.

What is an interest rate?

Your interest rate is the amount it costs to borrow money, expressed as a yearly rate. Lenders normally use federal benchmark rates to determine their own rates. These benchmarks change when economic conditions change. Then, each credit card company uses its own formula to determine interest rates for individual accounts.

If you don’t pay your credit card balance in full by the due date each month, your credit card issuer charges interest on the unpaid balance. In contrast, a loan accrues interest for the entire loan term: until you pay off the total amount (including the principal loan, fees, and interest).

Your credit history and your credit score play a big role in setting your interest rate on a credit card or loan. A low credit score may show you’re a risk and you’ll get a higher interest rate to offset that risk. A high credit score might indicate you’re more likely to pay back your debt and you’ll see a lower interest rate.

Lenders may also factor market conditions into their interest rates. Credit card companies use a fairly complex calculation to determine your interest charges.

Your average daily balance during a billing period determines your interest charge, which compounds daily. If you pay off your balance each month, you may not owe any interest on your credit card.

What is an APR?

Your annual percentage rate is the yearly interest rate your lender charges you for carrying a balance. There are different types of APRs, including:

Introductory APR
Penalty APR
Standard purchase APR
Balance transfer APR
Cash advance APR

Credit card APR vs. interest rate

Credit card issuers typically use the terms "APR" and "interest rate" interchangeably. They may charge cardmembers a different interest rate for late payments, balance transfers, or other transactions.

When comparing cards, APR and interest rates should mean the same thing. Many credit cards even offer a low introductory APR period after you open your account. After that promotion, the standard purchase APR applies. Your account begins accruing interest on any unpaid balance after your monthly due date.

Since a card issuer may charge different APRs for different types of transactions, make sure to check your card’s terms and conditions for a complete list of APRs.

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Is there a difference between an APR and an interest rate?

APRs and interest rates are the same when it comes to credit cards. When it comes to personal loans, they’re calculated differently.

Interest rates show the proportion of a loan that a borrower must pay a lender each year they pay down the principal.

A loan's APR includes its interest rate as well as fees, which can impact the price.

With the exception of revolving lines of credit (like a credit card or a home equity line of credit), a loan's APR is typically a higher percentage than its interest rate. For example, according to the Consumer Financial Protection Bureau, a mortgage APR may factor in a broker fee, discount points, insurance, and escrow fees on top of the interest rate. Other loans may charge origination or documentation fees.

To find the best mortgage rate for your unique circumstances, it’s wise to consider interest rates, APRs, and any factors that may change those rates over the loan term.

The bottom line

While interest rates and APRs overlap for some types of credit, knowing the difference between the rates for certain loans helps you evaluate how much you’ll owe. As you compare loan options, looking at both figures can help you avoid paying more in the long term.

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