Financial Glossary
Annual Percentage Rate (APR)
Annual percentage rate (APR) is the yearly cost of borrowing expressed as a percentage, including interest and certain required fees, calculated on the outstanding loan balance. It is standardized by regulation in the United States to allow consumers and businesses to compare the true cost of different credit products on an equal basis. APR differs from the nominal interest rate in that it incorporates origination fees, points, and other charges that affect the actual cost of the loan. For revolving credit, the APR reflects the periodic rate applied to outstanding balances.
Problem & Application
Business owners comparing loan offers frequently focus on the headline interest rate and overlook origination fees, prepayment penalties, and other charges that can make a nominally lower-rate loan more expensive in total cost. Two SBA loans with the same stated interest rate may carry materially different APRs depending on lender fees. For real estate investors and campground or marina operators taking on acquisition or construction debt, APR-based comparisons across multiple term sheets reveal which offer is actually cheaper. Understanding APR also matters when modeling debt service coverage ratios -- lenders calculate coverage on actual cash obligations, not nominal rates.
In Short
APR is the standardized basis for comparing borrowing costs, but lenders do not always lead with it. Always calculate APR across competing offers before committing to financing -- the cheapest-looking rate is rarely the whole story.