# Difference between interest rate and APR

**URL:** <https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522>\
**Category:** Factual Questions\
**Created:** [May 30, 2003, 1:55pm UTC](https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522 "2003-05-30T13:55:15Z")\
**Posts on this page:** 4\
**Page:** 1

<div class="post-metadata">

**Author:** ![FatBaldGuy](https://avatars.discourse-cdn.com/v4/letter/f/ecd19e/32.png) [@FatBaldGuy](https://boards.straightdope.com/u/FatBaldGuy)\
**Post date:** [May 30, 2003, 1:55pm UTC](https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522/1 "2003-05-30T13:55:15Z")

</div>

Lately I’ve been seeing a lot of ads for mortgage companies advertising their low interest rates. They have in big print a low “fixed rate” percentage, then in small print they disclose that the APR is a different rate, usually 1/4 to 1/2% higher than the advertised rate.

I’ve always thought that “interest rate” and “APR” were the same thing. To calculate the amount of a monthly payment that goes toward interest, I’ve always used the formula:

i = Principal Balance \* (APR / 365) \* Days since last pmt

Can someone explain what the difference is between these two terms? If the “interest rate” is now plugged into this formula instead of APR, how is APR calculated?

Thanks.  
FBG

---

<div class="post-metadata">

**Author:** ![daniel801](https://avatars.discourse-cdn.com/v4/letter/d/b2d939/32.png) [@daniel801](https://boards.straightdope.com/u/daniel801)\
**Post date:** [May 30, 2003, 2:10pm UTC](https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522/2 "2003-05-30T14:10:14Z")

</div>

APR is fairly useless. It is simply the quoted period’s rate times the number of periods in a year.

Example: 2% monthly would be–\>2% x 12 months = 24% APR

It’s uselss because it does not include compound interest.

What you want is the Effective Annual Rate (EAR) or the Annual Percentage Yield (APY), which take compounding into account.

---

<div class="post-metadata">

**Author:** ![aahala](https://avatars.discourse-cdn.com/v4/letter/a/a88e4f/32.png) [@aahala](https://boards.straightdope.com/u/aahala)\
**Post date:** [May 30, 2003, 2:11pm UTC](https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522/3 "2003-05-30T14:11:47Z")

</div>

The APR includes some, but not all fees, along with the interest rate.

Simply, the APR answers the question - what would be the interest rate with exactly the same cash flows as you have to pay on a loan with the fees.

---

<div class="post-metadata">

**Author:** ![chukhung](https://avatars.discourse-cdn.com/v4/letter/c/e79b87/32.png) [@chukhung](https://boards.straightdope.com/u/chukhung)\
**Post date:** [May 30, 2003, 2:11pm UTC](https://boards.straightdope.com/t/difference-between-interest-rate-and-apr/178522/4 "2003-05-30T14:11:53Z")

</div>

From this site, [http://http](http://http)://www.ny.frb.org/pihome/educator/define.html

> [@](#):
>
> The APR includes, as a percent of the principal, not only the interest that has to be paid on a loan, but **also some other costs, particularly “points” on a mortgage loan**.  
> …  
> For example, a 30-year mortgage with an interest rate of 8.0% and four points would have an APR of 8.44%, while a mortgage with an interest rate of 8.25% and one point would have an APR of 8.36%.
> 
> [Emphasis added]