Two loans with the same interest rate can cost very different amounts once origination fees, points and other charges are added. The APR folds those fees into a single yearly rate, which is why lenders in the U.S. must disclose it under the Truth in Lending Act. Working it out yourself lets you check a disclosure or compare a low-rate, high-fee offer with a higher-rate loan that has no fees.
Interest rate vs. APR
The interest rate is what the lender charges on the balance, and it alone sets the monthly payment. The APR starts from the same payments but measures them against the money you actually walk away with. When fees are taken out of the loan or paid at closing, you receive less than you owe, so the effective yearly rate is higher than the note rate. With no fees, the two are the same.
To see the payment and payoff date for a rate you already know, use the loan calculator; for a car, the auto loan calculator adds tax, trade-in and dealer fees.
Worked example: a $20,000 personal loan
A $20,000 loan at 7.9% for five years has a monthly payment of $404.57. If the lender charges a $600 origination fee taken out of the proceeds, you receive $19,400 but still repay $24,274.28 over 60 months. The rate that turns those 60 payments back into $19,400 is about 0.766% a month, so the APR is about 9.20%, well above the 7.9% on the offer.
If the same $600 is added to the balance instead, the payment rises to $416.71 and you receive the full $20,000. The APR in that case is about 9.16%. Either way, the fee adds more than a full point to the yearly cost of a five-year loan.
Why fees matter more on short loans
A fee is paid once, but the APR spreads it over the life of the loan. On a 30-year, $200,000 mortgage at 6%, $4,000 in points and fees lifts the APR only to about 6.19%, because the cost is spread across 360 payments. The same 2% fee on a two-year loan would add far more to the APR. If you plan to sell or refinance early, the fees cost you more per year than the APR suggests, since it assumes you keep the loan to the end.
Limits and assumptions
This calculator assumes a fixed rate and equal monthly payments for the full term. It does not model adjustable rates, interest-only periods, balloon payments or irregular first payments, and it leaves out costs you would pay without the loan, such as an appraisal or title insurance on many mortgages. Lenders follow detailed rules on which fees count as finance charges, so the APR on an official disclosure can differ slightly. Use the result to compare offers and check the numbers your lender gives you.
Key terms
- APR
- Annual percentage rate: the yearly cost of credit, including interest and finance charges, expressed as a single rate.
- Amount financed
- The credit you actually receive: the loan amount minus any prepaid finance charges taken out at closing.
- Finance charge
- The total dollar cost of the credit: all interest plus fees such as origination charges and points.
- Origination fee
- A charge for processing the loan, often a percentage of the amount borrowed and taken from the proceeds.