Two borrowing offers can look similar until you notice different percentages beside “APR.” The letters stand for Annual Percentage Rate. They give you a way to look beyond the amount you receive or the size of one payment.
A rate, not a dollar bill
For loans such as auto loans, APR reflects the interest rate plus certain additional borrowing charges, expressed as a yearly rate. That is why the interest rate and APR may differ.1 Compare APR with APR, rather than comparing one offer’s interest rate with another offer’s APR.
For a simple illustration, 12% of $1,000 is $120. That arithmetic explains the scale of a yearly percentage; it does not calculate the exact cost of a real loan. Payments, timing, fees and the changing balance affect what you actually pay.
The percentage still needs its surroundings
A lower APR does not automatically mean the lowest total cost if you borrow more or take longer to repay. The loan amount and repayment term still matter.
On credit cards, APR generally describes the annual interest rate. Cards can have different rates for different types of transactions, and fees may be listed separately.2 A promotional rate also deserves a look at what applies after the promotion ends.
You do not need to memorize every lending term before recognizing that a low payment and low cost are different claims. APR helps you ask a better question: what am I paying for access to this money, under these terms?
Sources & further reading
Examples are illustrative. Financial and employment references relate to the United States.