APR exists because the headline interest rate hides real costs. Lenders charge processing fees, broker commissions, mandatory insurance and account-keeping fees that add to the true cost. APR rolls all these into a single annualised percentage.
In the EU, APR (called TAEG in France and Italy, effektiver Jahreszins in Germany) must be displayed prominently on every credit offer under the Consumer Credit Directive. Switzerland uses a similar disclosure called effektiver Jahreszins regulated under the Consumer Credit Act.
APR is essential for comparing offers. Two mortgages both quoting 2.5% nominal may have very different APRs if one has CHF 3,000 in upfront fees and the other zero. Always compare the APR, not the nominal rate.
APR ≈ ((Total cost − Principal) / Principal) / Term in years × 100
A EUR 20,000 personal loan at 5% nominal with EUR 600 of fees over 5 years has an APR of about 6.1% — measurably more expensive than a no-fee 5.5% loan.