Two loans with the same interest rate can cost very different amounts once fees are added. That is why US lenders must disclose the annual percentage rate (APR) under the Truth in Lending Act: it folds points and prepaid finance charges into a single yearly rate so offers can be compared on equal terms. This calculator reproduces that calculation, shows the key Truth in Lending figures, and reveals how much higher your real cost is if you pay the loan off early.
How to use the APR calculator
- Enter the loan amount, the interest rate you were quoted and the term.
- Enter discount points as a percentage of the loan and the total of other prepaid finance charges such as origination and underwriting fees.
- Choose whether the charges are paid at closing or added to the loan.
- Read the APR, the finance charge, amount financed and total of payments, and the table of effective APRs for early payoff.
How APR is calculated
The payment comes from the loan amount L and the note rate:
The amount financed is the credit you actually receive: the loan minus prepaid charges (or the original amount when charges are financed). The APR is the rate that makes the payments repay exactly that amount:
The equation is solved numerically for the monthly rate i. The finance charge is the total of payments minus the amount financed.
Worked example
A $200,000 mortgage at 6.5% for 30 years, with 1 point ($2,000) and $2,500 of other lender fees paid at closing:
Payment on $200,000: $1,264.14 a month
Prepaid finance charges: 2,000 + 2,500 = $4,500; amount financed = $195,500
Monthly rate that repays $195,500 with 360 payments of $1,264.14: 0.560015%
APR = 0.560015% × 12 = 6.72%
Finance charge: $259,588.98; total of payments: $455,088.98
If the same $4,500 is added to the loan instead, the payment rises to $1,292.58 and the APR is 6.715%.
APR depends on how long you keep the loan
The disclosed APR spreads fees over the full term. Pay off or refinance sooner and those fees weigh more heavily:
| Paid off after | Effective APR |
|---|---|
| 3 years | 7.352% |
| 5 years | 7.051% |
| 10 years | 6.831% |
| Full 30 years | 6.72% |
If you expect to move or refinance within a few years, a loan with lower fees and a slightly higher rate may be cheaper even if its APR looks worse.
Using APR to compare offers
Compare like with like
APRs are most useful for loans with the same term and structure. A 15-year and a 30-year mortgage, or a fixed and an adjustable loan, can have APRs that are not directly comparable.
Short loans magnify fees
On a $10,000 personal loan at 9% for 3 years, a $500 origination fee pushes the APR to 12.541%. For short loans, always compare APRs rather than rates.
APR is not the effective annual rate
Regulation Z defines APR as the periodic rate times the number of periods, without compounding. The 6.72% APR above equals about 6.93% as an effective annual rate. See the effective annual rate calculator for that conversion, the basic APR calculator for short-term loans quoted as a flat fee, and the refinance calculator to judge whether paying points makes sense.
Estimates only. Official APRs follow Regulation Z rules for which charges count and how irregular periods are handled; your Loan Estimate or Truth in Lending disclosure is authoritative.
Frequently asked questions
What is the difference between APR and the interest rate?
The interest rate (note rate) sets your payment. The APR also counts prepaid finance charges such as points and origination fees, spreading them over the loan term to show the yearly cost of credit. Because the fees reduce the money you actually receive, the APR is higher than the note rate whenever fees are charged.
How is APR calculated with fees?
Work out the payment from the loan amount and note rate. Subtract the prepaid finance charges from the loan to get the amount financed. Then find the monthly rate at which the payments exactly repay the amount financed and multiply it by 12. There is no algebraic shortcut, so the rate is solved numerically.
Do points and fees matter more on short loans?
Yes. The same $500 fee on a $10,000, 3-year loan at 9% raises the APR to about 12.54%, because it is spread over only 36 payments. On a 30-year mortgage, $4,500 of points and fees adds only about 0.22 percentage points.
Why does the APR change if I refinance early?
The disclosed APR assumes you keep the loan for the full term. If you pay it off sooner, the up-front charges are spread over fewer months, so your actual cost is higher. The early-payoff table shows this for several holding periods.
Which fees are included in the APR?
Under Regulation Z, the finance charge includes interest, points, origination and most lender fees, and mortgage insurance. Many third-party charges on mortgages, such as appraisal, credit report, title insurance and recording fees, are excluded. Your Loan Estimate shows which fees were counted.