What APR means, and how to use it
The annual percentage rate (APR) is the yearly cost of a loan with interest and required fees counted together. It is the one figure that lets you compare two loans of different sizes, lengths and fee structures.
Key points
- APR counts interest and the fees you must pay to get the loan.
- Two loans with the same interest rate can have different APRs.
- 36% is the ceiling federal law sets for military borrowers and many states set for everyone.
- Compare APRs first, then the total repaid.
On this page
APR in one sentence
The annual percentage rate is what a loan costs you over a year, as a percentage of the amount borrowed, with interest and required fees counted together. Federal law requires every lender to state it before you sign, calculated the same way, so that offers can be compared.
APR and interest rate are not the same thing
The interest rate is the price of the money. The APR is the price of the loan. The difference is fees.
Take a $1,000 loan for 12 months at an interest rate of 29.99%. With no fees, the APR is also 29.99%. Now add a $50 origination fee that is taken out of the money you receive: you repay a $1,000 loan but only get $950. The payments are unchanged, yet the APR rises to about 40.3%. Judged by its interest rate, that loan sits under a 36% ceiling. Judged by its APR, the honest number, it does not.
What an APR looks like in dollars
A $1,000 loan repaid in 12 equal monthly payments:
| APR | Monthly payment | Total repaid | Cost of credit |
|---|---|---|---|
| 9.99% | $87.91 | $1,054.92 | $54.92 |
| 19.99% | $92.63 | $1,111.56 | $111.56 |
| 28.00% | $96.51 | $1,158.12 | $158.12 |
| 35.99% | $100.46 | $1,205.52 | $205.52 |
The calculator does the same for any amount from $100 to $5,000.
Why 36% is the line
There is no single federal cap on what a civilian can be charged. But 36% keeps appearing as the boundary between ordinary credit and high-cost credit. The Military Lending Act caps loans to active-duty service members and their dependents at a 36% rate that includes fees. Many states cap small loans at or near the same figure. Federal credit unions may charge no more than 28% on payday alternative loans.
Northlight uses the same boundary. A loan has to carry an APR of 35.99% or less, fees included, to appear here. See rates and terms.
Loans priced by a flat fee
Some short loans do not quote a rate at all. They quote a fee: so many dollars for each $100, due with the loan a few weeks later. Such a loan still has an APR, and the lender must disclose it. Because the fee buys days and not a year, that APR is usually many times 36%. This is the main reason single-payment loans are outside our standard. How payday loans work explains the mechanics.
How to compare two offers
- Check that both figures are APRs, not interest rates or monthly rates.
- Compare the APRs. The lower one is the cheaper credit.
- Compare the total repaid if the terms differ. A longer loan at a slightly lower APR can still cost more in dollars.
- Check the payment against your monthly budget, with room left over.
- Ask about late fees and early repayment. Neither is part of the APR.
Common questions
Is a lower APR always the better loan?
It is the cheaper credit per year. If one loan runs much longer, add up the total repaid as well, because more months of interest can outweigh a lower rate.
Does checking a rate hurt my credit score?
Many lenders show a rate after a soft credit check, which does not affect your score. A full application usually involves a hard check, which can lower it slightly for a time.
What is a good APR for a personal loan?
It depends on your credit. Federal credit unions may not charge more than 18% on most loans or 28% on payday alternative loans. Above 36%, a loan is high-cost by the standard federal law uses for military families.
Is Northlight a lender?
No. Northlight does not make loans or credit decisions. We show what a loan costs and what the law allows.
See the payment before you apply
Pick an amount and a term. The calculator shows the monthly payment, the total and the cost of credit at the highest APR we allow.
Sources
Keep reading
- Are payday loans legal?Payday loans are legal in 29 states, capped at 36% to 50% APR in 10 and not allowed in 11 states plus D.C. See which group your state is in.
- If you can't repayMissed a payday loan payment? Here is what lenders can and cannot do: fees, bank debits, collections, lawsuits, and how to stop the damage.
- Can payday lenders sue you?Yes, a payday lender can sue over an unpaid loan, but it needs a court judgment to garnish wages. Learn the process, the limits and your defenses.
- Payday loan scamsUpfront fees, fake debt collectors and unlicensed lenders: learn the most common payday loan scams and the checks that confirm a lender is real.
- Credit card cash advanceA credit card cash advance costs a 3% to 5% fee plus a higher APR with no grace period. See the real cost and how it compares with a payday loan.
- How to borrow money fastA practical order of operations for borrowing money quickly: what to try in the first hour, the first day and the first week, with typical costs.