What does the Annual Percentage Rate (APR) measure?

The Annual Percentage Rate (APR) measures the cost of credit on a yearly basis expressed as a percentage. It reflects the total yearly costs of borrowing money and includes not only the interest rate on the loan but also any additional fees or costs that may be associated with obtaining credit. By presenting this information as a percentage, the APR allows consumers to easily compare different loan products or credit offers.

This metric is crucial for understanding the true cost of borrowing since it gives a comprehensive view that goes beyond just the nominal interest rate. It helps borrowers make informed decisions as they can evaluate how much they will actually pay for credit over a year.

Understanding APR is particularly important when applying for loans or credit cards because it can significantly affect the cost of borrowing. High APRs can indicate more expensive credit options. In this context, recognizing that other options do not accurately define APR reinforces the importance of differentiating between various financial terms related to interest and fees.