Offer A Your first quote
Offer B The one to compare
True cost, fees included
The APR folds fees into the rate, which is why a lower interest rate can still be the more expensive loan.
APR is calculated from the payment stream and the amount actually received after upfront fees, using the standard actuarial method. It assumes equal monthly payments and no late fees. True Link Finance charges no origination or application fee, so on our loans the interest rate and the APR are identical.
Why a lower rate can be the worse deal
Two offers, same $2,000, same 12 months. Offer A quotes 19.9% interest with a 6% origination fee. Offer B quotes 22.9% with no fee. The first looks three points cheaper and is not.
With Offer A, the 6% fee is deducted before funding, so $1,880 reaches your account while you repay as though you borrowed $2,000. Once that is accounted for, the true APR on Offer A is around 32%, well above Offer B. That gap is exactly what the APR figure exists to expose, and why the Truth in Lending Act requires it to be disclosed.
What goes into an APR
- The interest rate charged on the principal
- Origination or administration fees deducted from or added to the loan
- Any other charge required to obtain the credit, including some application and processing fees
Charges that are optional, or that only apply if something goes wrong, sit outside the APR. Late fees and returned payment fees are not included, which is worth remembering: two loans can share an APR and still differ in what happens when a payment is missed.
The two questions to ask any lender
How much money actually lands in my account, and what is the total of all payments? Those two numbers, with the term, tell you everything. A lender that will not answer them plainly is not one to borrow from.
Using this calculator
- Enter the amount you need, not the amount quotedIf a fee is deducted at funding, you may need to borrow more to receive the sum you actually require.
- Put the interest rate in the rate field, not the APRIf the lender only gave you an APR and confirmed there are no fees, the two are the same and you can enter it directly.
- Include every upfront chargeOrigination, administration, processing, and documentation fees all belong here.
- Compare the total cost, not just the APRTwo loans at the same APR over different terms cost very different amounts in total.
Where APR is misleading
APR annualises a cost, which distorts short-term borrowing. A $300 loan repaid over three months might carry an eye-watering APR while costing under $20 in actual interest. For very short terms, look at the dollar cost first and use APR only to compare like with like.
It also assumes the loan runs its full term. Pay off early on a loan with no prepayment penalty and your effective cost falls below the stated APR. Our position on early payoff is on the interest rates page.
Questions about APR
What it includes, what it leaves out, and when it misleads.
What is the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal. The APR includes the interest rate plus any fees required to obtain the credit, which makes it the fairer basis for comparing lenders. When a loan has no origination or application fee, the two numbers are identical.
Does APR include late fees?
No. APR covers charges required to obtain the credit, not charges that depend on something going wrong. Late fees, returned payment fees, and similar penalties sit outside it, so two loans with the same APR can still behave very differently if you miss a payment.
Is a lower interest rate always cheaper?
No. A loan at 19.9% with a 6% origination fee can easily cost more than one at 22.9% with no fee, because the fee is deducted before you receive the money while you still repay the full amount. Comparing APRs, or total cost against money received, exposes that immediately.
How is APR actually calculated?
It is the rate at which the present value of all your payments equals the amount you actually received after upfront fees. There is no closed-form solution, so it is found numerically, which is what this calculator does.
Why do short-term loans show such high APRs?
Because APR annualises a cost that is incurred over a few months. A $300 loan repaid over three months may show a high APR while costing under $20 in real interest. For short terms, check the dollar cost first.
Does paying early lower my effective APR?
On a loan with no prepayment penalty, yes. Interest accrues on the outstanding balance, so clearing it early removes interest that has not yet accrued and your effective cost falls below the stated APR.