Definition: The overall interest for a loan per yearly period. This is the sum total of the interest rate charged over the compounding period (usually daily or monthly) and so does not represent the actual interest accrued.
For example, an advertised APR may be 9.99%. If this is compounded monthly, the actual rate is 9.99% divided by twelve, giving us a monthly interest rate of 0.8325% adding to the balance each month and compounding the next month. This gives an effective APR of 10.46%.
While not an accurate reflection of the interest being charged, the APR can provide a way to quickly compare lenders. The calculation can vary between lenders, so it is important to read the APR section of the loan or credit card contract.
See Effective Annual Percentage Rate for more information.
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