What does the annual percentage rate (APR) represent?

The annual percentage rate (APR) represents the yearly interest rate expressed as a percentage of the principal amount. It reflects the cost of borrowing by showing how much interest a borrower will pay over the course of a year based on the principal amount of the loan. APR is crucial because it allows borrowers to compare the costs of different loans or credit products, as it provides a standardized way of presenting interest rates, inclusive of any additional fees or costs associated with the loan.

In comparing APR, it takes into account not just the interest but also other costs that may be included in the lending terms, ensuring a more comprehensive picture of what the loan will truly cost on an annual basis. This is especially important in the context of consumer finance, as it helps individuals make informed decisions based on the total costs of borrowing rather than just focusing on monthly payments or isolated fees.