What APR actually measures
Annual percentage rate (APR) is the yearly cost of borrowing, expressed as a percentage, that includes both interest and most required fees. The federal Truth in Lending Act (TILA) requires lenders to disclose it before you sign, so you can compare credit offers on the same basis.
APR vs. interest rate
The interest rate is only the cost of borrowing the principal. APR adds in finance charges such as origination fees. If a loan has no fees, the APR and interest rate are essentially the same. If it has fees, the APR will be higher, and it's the more honest measure.
How an origination fee changes your APR
Consider a $1,000 loan for 12 months at a 20% interest rate. With no fee, the APR is 20%. Add a 5% origination fee ($50 deducted from what you receive) and you're effectively paying interest on $1,000 while receiving $950. The APR rises to roughly 30%.
This is why two loans with the same interest rate can have very different APRs, and why Loanify always shows the APR, the amount financed and the amount you'll actually receive.
Turning APR into dollars
Percentages are abstract. Dollars aren't. Here's what a $1,000 loan costs over 12 months at different APRs:
| APR | Monthly payment | Total interest |
|---|---|---|
| 9.99% | $87.91 | $54.93 |
| 17.99% | $91.68 | $100.10 |
| 24.99% | $95.04 | $140.47 |
| 35.99% | $100.46 | $205.49 |
| 400% (typical payday equivalent) | Roughly $4,000+ in fees if rolled over for a year | |
The gap between 17.99% and 35.99% on a small loan is about $100 over a year. Meaningful, but far smaller than the gap between any installment loan and a payday loan that's rolled over.
How to compare two loan offers
- Compare APRs for the same amount and term.
- Check the total of payments, which tells you the full dollar cost.
- Confirm the amount you'll receive after any fees.
- Look for prepayment penalties. Loanify has none.
- Read late-fee terms so you understand the cost of a missed payment.
A lower monthly payment is not the same as a cheaper loan. Stretching $2,000 from 12 to 24 months at the same APR roughly doubles the interest. Always check the total of payments.Lending tip from the Loanify Editorial Team
Frequently asked questions
Is a lower APR always better?
For the same amount and term, yes. But also compare fees, flexibility and prepayment rules.
Why is my APR higher than advertised?
Advertised rates are often the lowest available to the strongest applicants. Your APR depends on your credit, income and state.
More guides
Choosing your Loanify loan term: 3 to 36 months
Origination fees explained
Loanify loan requirements: what lenders check and why
About the Loanify Editorial Team
Our guides are researched, written and fact-checked against federal lending rules, CFPB guidance and current loan terms. Every payment example is calculated with the standard amortization formula. Read our editorial policy.