What is an annual percentage rate (APR)?

An annual percentage rate (APR) is defined as the total cost of borrowing expressed as a percentage. This includes not only the interest rate charged on the loan but also any associated fees or additional costs expressed on an annual basis. APR is a critical measure as it allows borrowers to understand the true cost of a loan or credit over the course of a year, making it easier to compare different financial products.

The calculation of APR encapsulates all components of the loan costs, not just the nominal interest rate, providing a clearer picture of how much borrowing will actually cost the borrower. This transparency helps individuals make informed financial decisions when considering loans or credit. Other options do not encompass the complete essence of APR, focusing instead on narrower aspects of borrowing or investment.