The advertised interest rate is not the cost of borrowing. Two lenders can quote 7% and 7% while one charges $0 in fees and the other charges 2 points and a $995 origination fee. The annual percentage rate (APR) folds those costs into a single number, which is exactly why regulators require it on loan disclosures.
Annual percentage rate (APR)
9.744%
Stated rate 8% plus $800 of upfront fees over 60 payments.
| Item | Amount |
|---|---|
| Loan amount financed | $20,000 |
| Stated interest rate | 8% |
| Monthly payment (principal & interest) | $405.53 |
| Upfront fees | $800.00 |
| Monthly fees | $0.00 |
| Total interest over the term | $4,331.67 |
| Effective APR | 9.744% |
| Total cost of credit | $5,131.67 |
Total cost of credit = all interest plus every fee, which is the number to compare against another offer of the same length.
This calculator takes the loan amount, the stated rate, the term and the fees you pay up front, then solves for the rate that equates the payments with the cash you actually receive.
The APR is the discount rate that makes the present value of every scheduled payment equal to the amount actually advanced to the borrower — the loan amount minus fees paid up front.
Because the same payments are discounted against a smaller cash amount, the solved rate is higher than the stated rate. The larger the upfront fee, the wider the gap.
There is no algebraic solution for the rate, so the calculator solves it numerically by bisection: it narrows an interest range until the present value of the payments matches the net amount received, to within a fraction of a cent.
This is the same approach used by spreadsheet RATE functions and lending software, which is why the result matches the APR printed on a Regulation Z disclosure.
Include origination fees, discount points, application and underwriting fees, and any other charge that exists only because you took the loan. Exclude third-party costs you would pay in cash regardless, such as a property appraisal or title insurance, depending on how your lender discloses them — the exact treatment is what makes disclosed APRs differ slightly between lenders.
Each example below was run through the calculator on this page when the site was built, so the numbers match what you see when you enter the same inputs.
Annual percentage rate (APR)
9.744%
Stated rate 8% plus $800 of upfront fees over 60 payments.
A modest fee still pushes the true cost noticeably above the quoted 8%.
Annual percentage rate (APR)
6.442%
Stated rate 6.25% plus $6,000 of upfront fees over 360 payments.
Two points on a long loan look small per month but show up clearly in the APR.
Annual percentage rate (APR)
18.594%
Stated rate 12% plus $500 of upfront fees over 24 payments.
On short loans, fees dominate the APR because there are few payments to spread them across.
Because the APR includes fees paid up front. You receive less cash than the loan amount but repay the full amount plus interest, so the effective rate is higher. The bigger the fee, the bigger the gap.
Use the APR when comparing loans with different fee structures and the same term, because it captures both rate and costs. For loans you may repay early, also check whether fees are refundable and whether a prepayment penalty applies — APR assumes you hold the loan for the full term.
Yes, but differently. Card APRs are quoted as an annual rate applied to a revolving balance, so there is no term to amortize. Compare card APRs directly and watch for penalty APRs that apply after a missed payment.
Points trade cash today for a lower rate tomorrow. Divide the points paid by the monthly saving to get the break-even month: if you keep the loan longer than that, points win. If you may sell or refinance sooner, keep the cash.
APR measures the cost of borrowing using a nominal annual rate, ignoring compounding within the year. APY (or effective annual rate) includes compounding, so it is the right measure for savings accounts and the wrong one for comparing loans.
Lenders follow specific disclosure rules about which fees count and how they are timed, and a few fees are excluded entirely. Small timing differences — such as whether the first payment is one month or 30 days after closing — also shift the result slightly.
Last reviewed 2026-09-13. This page is an estimate tool, not financial, tax or legal advice.Read the full disclaimer.