What is APR and how to compare loans
APR (Annual Percentage Rate) is the true cost of a loan expressed as a yearly percentage. Unlike the nominal interest rate, APR includes fees and other mandatory charges, making it the only valid metric for comparing two loan offers on equal terms.
- APR includes the nominal rate plus the compulsory fees, which makes it the number to compare loans with
- The nominal rate is just the base interest, without fees: always lower than APR
- On mortgages the APRC adds valuation, notary and registry fees, so it is more complete than the APR
- A high origination fee can push APR well above the nominal rate
- APR leaves out optional products and bundled insurance, so add those costs separately
- Early repayment makes sense when loan rate exceeds what you could earn investing that money
Interest rate vs APR: the difference that can cost you thousands
The nominal interest rate is just the base cost of borrowing, with no additional charges included. APR incorporates the nominal rate plus origination fees, processing charges, and any other mandatory costs tied to the loan. A one-year loan with a 5% nominal rate and a 2% origination fee works out at an APR of around 6.8%, and that is what you actually pay. Two loans with identical nominal rates can have very different APRs depending on each lender's fees. That is why regulators require APR to be prominently disclosed in all loan advertising.
How APR is calculated
APR is calculated using a financial formula that accounts for: the nominal interest rate, payment frequency (monthly, quarterly), origination and processing fees, and the total loan term. For a personal loan with no fees, APR closely matches the annualised nominal rate. The gap between the two widens sharply when fees are high: a 2% origination fee on a one-year loan can push APR more than 2 percentage points above the nominal rate.
What APR does not include
APR has an important limitation: it does not cover optional add-ons or bundled products. If the lender requires you to take out a life insurance policy or home insurance to access a promotional rate, that cost does not appear in the APR. The same applies to current account maintenance fees that some banks bundle with the loan. For a truly complete comparison, always add these extra costs to the total loan cost.
APR on mortgages: APRC
For mortgages, the equivalent measure is the APRC (Annual Percentage Rate of Charge), which on top of the standard APR components includes mandatory valuation, notary, land registry, and legal fees. APRC is the most comprehensive figure for comparing mortgages, though some lenders only show the basic APR in their marketing. Always ask for the full APRC before signing.
When does early repayment make sense?
Early repayment reduces your outstanding balance and therefore future interest. It makes sense when: (1) the loan rate is higher than the return you would earn investing that money; (2) there is no early repayment penalty, or it is lower than the interest saved; (3) you want to lower your monthly payment to improve cash flow. For variable-rate loans in high-rate environments, early repayment is often highly worthwhile. For fixed-rate mortgages taken out when rates were low, investing that cash may outperform paying down the loan.
Practical example: comparing two loans using APR
Loan A: €10,000 over 3 years, 6% nominal rate, no origination fee. Monthly payment €304.22, total paid €10,951.90, APR 6.17%. Loan B: €10,000 over 3 years, 5% nominal rate, 2% origination fee (€200). Monthly payment €299.71, total paid €10,989.52 with the fee included, APR 6.54%. Loan B has the lower nominal rate and the smaller payment, yet it costs more: the APR says so straight away. Going by the nominal rate alone you would pick B and pay €38 more.
Frequently asked questions
What is APR?
The annual percentage rate: the yearly cost of a loan including interest and most fees.
Why is APR higher than the interest rate?
Because it adds fees and charges to the interest, spread over the life of the loan.
What does APR not include?
Some costs, such as certain third-party fees or optional insurance, and it assumes you keep the loan to maturity.
What is the APRC?
The EU equivalent of APR for mortgages and consumer loans, used to compare offers.