What Is APR? The Number That Determines How Much Debt Really Costs
APR stands for Annual Percentage Rate and it is the most important number on any loan or credit card. Here is why.
APR is the annual cost of borrowing money expressed as a percentage. A 20% APR means for every $100 borrowed, you pay $20 per year in interest. But credit cards compound daily, so the actual cost is slightly higher than the stated APR (this effective rate is called APY). A 24% APR compounded daily equals approximately 27% APY.
APR by Debt Type
Credit cards: 20-30% APR (the most expensive common debt). Personal loans: 8-20%. Auto loans: 5-10%. Student loans (federal): 5-7%. Mortgages: 6-7.5%. HELOCs: 8-10%. Payday loans: 300-700% (yes, really — this is why they destroy finances).
Why 1% Matters More Than You Think
On a $300,000 mortgage, 6% vs 7% APR = $197/month difference and $71,000 over the life of the loan. On a $5,000 credit card balance, 20% vs 24% APR = $200/year difference. On a $25,000 car loan, 5% vs 8% = $40/month and $2,400 total. Small rate differences create enormous cost differences over time because interest compounds.