Definition
APR shows you the true annual cost of borrowing by including not just the interest rate but also lender fees, points, and other costs. It's always equal to or higher than the interest rate. APR is what you should compare when shopping lenders—it's the apples-to-apples cost comparison.
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Unlike the interest rate, APR factors in all loan costs, making it useful for comparing loan offers from different lenders. Truth-in-Lending disclosures must prominently display APR so borrowers understand the total annual percentage cost. APR will always be equal to or higher than the interest rate because it includes additional fees.
Pro Tip
Always compare APR rather than interest rate when shopping for mortgages to get a true cost comparison between lenders.
Example
Two lenders offer a $300,000 loan at 6% interest. Lender A charges $3,000 in fees with an APR of 6.2%, while Lender B charges $7,000 in fees with an APR of 6.9%.