Two loans can have the same interest rate and very different true costs. That's why federal law requires lenders to disclose APR — Annual Percentage Rate — alongside the headline rate.
What each number actually means
Interest rate is what the lender charges to use the money, expressed as a yearly percentage of the balance. It funds the bank's cost of capital and profit margin.
APR is the interest rate plus most required fees — origination, discount points, broker fees, certain closing costs — annualized over the life of the loan. Two loans with the same interest rate and different fees will have different APRs. The higher APR is the more expensive loan.
Why APR is the only number to compare
Lenders compete on the headline rate because it's the smaller, more attractive number. A 7.99% loan with a 6% origination fee can have the same true cost as a 9.99% loan with no fee. APR exposes that — it normalizes the comparison.
Where APR can still mislead
- Adjustable-rate loans: APR assumes the rate never moves, which it will.
- Short-term loans: spreading a $20 fee on a $500 two-week loan across a year produces an APR of 400%+. Mathematically correct, but not how you experience the cost.
- Mortgage points: paying points lowers your interest rate but is built into APR. If you sell or refinance before the break-even point, the APR overstates your real cost.
The borrower's rule
When two loans have the same term length and similar structure, compare APR. When the structures are different (fixed vs adjustable, short vs long term), compare total dollars paid over the period you actually plan to hold the loan. That second number is the one that hits your bank account.