Annual percentage rate (APR)

Definition

The annual percentage rate (APR) is a standardised way of expressing the overall cost of borrowing, including both the interest rate and certain fees, as a single percentage. It’s designed to provide borrowers with a clearer understanding of the true cost of a loan or credit product.

What is the annual percentage rate?

The APR takes into account not only the interest rate charged on the borrowed amount but also any additional costs such as origination fees, points, and certain other finance charges. By including these costs, the APR gives borrowers a more accurate representation of what they’ll actually pay over the life of the loan or credit agreement.

Lenders are typically required to disclose the APR to borrowers when offering loans or credit, allowing borrowers to compare different offers more easily and make informed decisions about their borrowing options. Keep in mind that while the APR provides a helpful comparison tool, it may not cover all potential costs, so it’s important to carefully review all terms and conditions before committing to a loan or credit product.

Example of annual percentage rate

  1. Car loan details:
    • Alex is in the market for a new car and decides to finance the purchase with a loan. He borrows $20,000 from a bank to be repaid over 5 years.
  2. Nominal interest rate:
    • The bank offers Alex a nominal interest rate of 5% per year on the loan.
  3. Additional fees:
    • In addition to the interest rate, there are some upfront fees associated with the loan, such as an origination fee and processing fees. These fees amount to $500.
  4. Calculation of APR:
    • The APR is calculated by considering both the interest rate and the additional fees. In this case:
      APR = 5% + ($500 / $20,000) × 100%

    The APR, in this case, is 7.5%. It provides a more comprehensive view of the total cost of the loan, including both interest and fees.

Clever finance tips and the latest news

Delivered to your inbox monthly

Join the 95,000+ businesses just like yours getting the Swoop newsletter.

Free. No spam. Opt out whenever you like.

Our offices:

Disclaimer: Swoop Finance Pty Ltd (ABN 52 644 513 333) helps Australian firms access business finance, working directly with firms and their trusted advisors. We are a credit broker and do not provide finance products ourselves. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance Pty Ltd can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness, we may receive a commission or finder’s fee for effecting such introductions. Swoop Finance Pty Ltd does not provide any kind of advice and in giving you information about providers products, we are not making any suggestion or recommendation to you about a particular product. Offers of finance are subject to a separate assessment process by the provider and subject to their terms and conditions. If you feel you have a complaint, please read our complaints section which is contained within our terms and conditions.

© Swoop 2025

Looks like you're in . Go to our site to find relevant products for your country. Go to Swoop