Annual percentage rate (APR)
Also called: APR
Annual percentage rate is the yearly cost of financing expressed as a single percentage that folds in interest and most required fees.
APR converts the total cost of a loan into one annualized rate so you can compare offers on the same footing. It captures the stated interest rate plus many of the fees baked into the deal, such as an origination fee or certain closing costs, then spreads that combined cost across the life of the loan. Because it includes fees, the APR on a loan is usually a little higher than the plain interest rate. A loan with a 9 percent interest rate and a sizable origination fee might carry an APR closer to 11 percent once everything is rolled in.
For a borrower, APR is the cleanest single number for comparing two true loans of similar length. Watch the limits though. APR assumes the loan runs to term, so paying off early changes the real cost, and it does not capture every fee. It also gets distorted on very short products, where a modest dollar cost can translate into a large APR. Note that a merchant cash advance is a purchase of future receivables, not a loan, and its cost is quoted as a factor rate rather than an interest rate or APR, so an APR comparison does not map cleanly onto it.
Common questions
Why is APR higher than the interest rate I was quoted?
Because APR adds required fees like origination charges to the interest, while the interest rate alone leaves them out. The gap between the two roughly reflects how much those fees cost you.
Can I compare an MCA using APR?
Not directly. A merchant cash advance is a purchase of future receivables, not a loan, and it is priced with a factor rate. You can estimate an equivalent cost, but the two are quoted in different terms.
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