What is the difference between a loan's interest rate and its annual percentage rate (APR)?

The note (interest) rate is the percentage charged on the loan's principal balance and determines the base interest portion of the payment. The annual percentage rate (APR) is a broader figure required by the Truth in Lending Act that includes the interest rate plus certain finance charges and fees (such as some origination or mortgage-insurance costs) expressed as a yearly rate, so borrowers can compare the true cost of competing loans. Because APR folds in additional costs, it is usually slightly higher than the note rate. Brokers and agents should understand the distinction so they can help clients compare loan offers and so advertising of rates is accurate.