APR is the price tag on borrowed money, written as a yearly percentage. A $1,000 balance at 20% APR costs roughly $200 a year to carry. It covers the interest plus some of the fees, so you can compare loans apples to apples.
APR stands for annual percentage rate — annual means yearly, and the rate is the cost of the loan. Lenders have to show it, and that is a gift: it lets you compare a credit card, a car loan, and a personal loan on the same ruler.
APR versus the interest rate
Close cousins, not twins. The interest rate is just the cost of the money itself. The APR folds in interest plus some required fees, like loan charges. So APR is usually a touch higher — and a more honest picture of what the borrowing really costs.
Carry a $1,000 balance on a credit card at 24% APR and it costs about $240 over a full year — roughly $20 a month — just for the privilege of owing it. Pay the balance in full every month, though, and the APR never gets a chance to charge you a dime.
How it works on credit cards
Cards charge APR only on money you carry past the due date. The rate is yearly, but the charge is applied monthly on what you owe. That is why paying a little more than the minimum matters: every extra dollar you pay down is a dollar that stops getting charged.
Fixed, variable, and penalty rates
A fixed APR stays put. A variable APR moves when a national benchmark rate moves — your card's rate can drift up without you changing anything. And many cards hide a penalty APR: miss payments and your rate can jump to near 30% on everything you owe.