The annual percentage rate, or APR, is a standardized measure of the cost of borrowing over a year. It includes the stated interest rate plus certain fees, which makes it more useful than the nominal rate alone when comparing credit offers.
Why APR Exists
Two loans can advertise the same nominal interest rate but have different origination fees, points, or other finance charges. APR is meant to put those costs onto a common annual basis so borrowers can compare offers more accurately.
Cash-Flow Logic
Conceptually, APR is the rate r that makes the present value of the borrower’s scheduled repayments equal to the net cash actually received:
[ \text{Net proceeds} = \sum_{t=1}^{T} \frac{\text{Payment}_t}{(1+r)^t} ]
If fees reduce the cash received up front, the APR rises even when the nominal interest rate stays unchanged.
What APR Does And Does Not Capture
APR is useful, but it is not perfect. It may not include every possible fee, and it is not the same thing as the effective annual rate driven purely by compounding. Its main job is disclosure and comparability in consumer credit markets.