Annual percentage of rate (APR), just like nominal APR and effective APR (EAR), describes the annualized interest rate, or the rate for an entire year. This is opposed to the traditional rate that is per month.

There are two general types of APR: (1) the nominal APR, which is the simple annual interest rate, and (2) the effective APR, which covers the fee in addition to compound interest rate, which is calculated over the year.

Nominal APR

Taking the rate and multiplying it by the number of payment periods in a given year equals the nominal APR. There are countries or states where the APR is the simplified equivalent to the effective interest rate that the borrower will yield for a loan.

In most countries and jurisdictions, the law necessitates lenders to reveal the "cost" of borrowing in order to protect consumers’ rights. The APR is designed to simplify the process of comparison between lenders and loan packages. However, keep in mind that the APR would most likely be not equivalent to the "note rate" or "headline rate" declared by the lender. This is because of additional fees into the APR. Make sure to know the exact APR by directly asking the lender or by perusing the contract carefully.

In the United States and in the UK, the law requires lenders to present the APR before the loan or credit application is finalized, even though they have different definitions of APR.

Effective APR

Meanwhile, the "effective APR" (EAR) may differ in various areas, based on the inclusion of different types of fees, such as participation fees, loan origination fees, monthly service charges, and late fees. The EAR is also referred to as the "mathematically-true" interest rate for every year.

The amount of EAR in different regions may also vary, based on whether the up-front fees (for example, the participation or origination fees) are incorporated to the entire amount or considered as a short-term loan that is payable during the first payment.