APR Calculator
Calculate the true Annual Percentage Rate (APR) on mortgages, auto loans, and personal loans including upfront origination fees, closing costs, and discount points.
Loan & Fee Details
Quick Answer: What is APR and How is it Calculated?
Annual Percentage Rate (APR) is the standardized annualized metric representing the total cost of borrowing money. Unlike nominal interest rates, true loan APR factors in both the periodic interest rate and all mandatory upfront finance charges (such as origination fees, processing fees, and closing costs). It is calculated using internal rate of return (IRR) numerical iteration to reveal the real cost of credit under the Truth in Lending Act (TILA).
Interest Rate vs. True APR: Understanding the Difference
When shopping for a mortgage, auto loan, or personal credit line, lenders advertise two distinct rates:
- Nominal Interest Rate: The base percentage rate applied directly to your remaining principal balance to determine your monthly interest payment. It ignores upfront fees.
- Annual Percentage Rate (APR): The true comprehensive cost of credit. APR incorporates the interest rate plus any upfront origination fees, points, or closing costs amortized across the full loan term.
How Upfront Fees Increase Effective APR
The table below demonstrates how upfront loan fees increase the true APR on a $200,000 30-Year Fixed Loan at a 6.50% nominal interest rate:
| Loan Principal | Nominal Rate | Upfront Fees / Points | Monthly Payment | True APR |
|---|---|---|---|---|
| $200,000 | 6.50% | $0 (No Fees) | $1,264.14 | 6.500% |
| $200,000 | 6.50% | $2,500 (1.25%) | $1,264.14 | 6.612% |
| $200,000 | 6.50% | $5,000 (2.50%) | $1,264.14 | 6.728% |
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Frequently Asked Questions
Common questions and answers about the APR Calculator.
What is the difference between Nominal Interest Rate and APR?
The interest rate is the base percentage cost charged on the borrowed principal amount. APR (Annual Percentage Rate) includes the interest rate PLUS upfront finance charges like origination fees, discount points, and closing costs, revealing the true annual cost of borrowing.
Why is the APR higher than the quoted Interest Rate?
APR is higher because it incorporates upfront lender fees into the total cost of credit. The fees reduce the net loan proceeds you receive while your monthly payments stay based on the full principal, increasing the effective annual percentage rate.
How does the APR Calculator handle origination fees and closing costs?
Our calculator uses the Newton-Raphson internal rate of return (IRR) formula. It deducts upfront fees from the principal to establish net proceeds, then solves for the exact periodic discount rate that equates payment cash flows back to the net proceeds.
Can I calculate mortgage APR and auto loan APR with this tool?
Yes! Use our quick preset buttons for 30-Year Mortgage or 5-Year Auto Loan, or enter custom loan amounts, terms, rates, and closing costs to analyze any loan structure.
What is the federal Truth in Lending Act (TILA) APR rule?
Under TILA, US lenders are legally required to disclose the True APR alongside the nominal interest rate on loan disclosures so consumers can make apples-to-apples cost comparisons between competing lenders.