What is APR? (Annual Percentage Rate Explained)
A clear explanation of Annual Percentage Rate, how it differs from simple interest rates, and why it matters when comparing business loan offers.
Annual Percentage Rate (APR) represents the total yearly cost of borrowing money, expressed as a percentage. Unlike a simple interest rate, APR includes fees and other charges, giving you a more complete picture of what a loan actually costs.
Why APR Matters for Business Owners
When comparing loan offers, looking at the interest rate alone can be misleading. Two loans with identical interest rates can have vastly different total costs if one has higher fees. APR levels the playing field by rolling all costs into a single number.
For business financing, APR helps you compare different types of products fairly. A merchant cash advance might advertise a low fee, but when converted to APR, it could exceed 50% or more annually.
APR Calculation Example
Consider a $100,000 loan with a 10% interest rate and a $3,000 origination fee. The simple interest cost over one year would be $10,000. But when you add the $3,000 fee, you are really paying $13,000 to borrow $100,000 (since you only receive $97,000 after the fee). That brings the effective APR closer to 13.4%.
Short-Term Loans and APR
APR is especially important for short-term loans. A 3% fee on a 3-month loan might seem small, but annualized it equals 12% APR just in fees alone, before any interest charges.
APR vs. Interest Rate
The interest rate is the base cost of borrowing, while APR includes origination fees, closing costs, and other charges. For SBA loans and traditional bank loans, the difference between interest rate and APR is usually small. For alternative financing, the gap can be significant.
- Interest Rate: The base percentage charged on principal
- APR: Total cost including all fees, expressed annually
- APY: Annual Percentage Yield, includes compounding (used for savings, not loans)
Using APR to Compare Offers
When evaluating financing options, always ask for the APR. Reputable lenders will provide this figure. If a lender cannot or will not give you an APR, consider it a warning sign.
Remember that APR works best for comparing loans with similar terms. Comparing a 5-year loan APR to a 6-month loan APR still requires additional context about your cash flow and repayment capacity.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.