There are two things to consider when borrowing money: the APR and the interest rate. They both provide valuable information about your loan, but they serve different purposes and use different terms that may seem confusing at first glance. So if you’re not sure what APR or interest rate means, don’t worry. This guide will help demystify them so you can get a better idea of how they work and how they apply to your situation.
What is APR?
APR stands for annual percentage rates and is essentially a rate of interest that lenders charge to cover the costs associated with a given loan. (Technically, it’s an effective annual rate since interest compounds monthly.) These costs include everything from administrative expenses to financing charges to origination fees. Borrowers typically pay both principal and interest in fixed monthly installments until their loans are paid off.
A good rule of thumb for finding out what is APR for cars is that anything under 10% APR, or Annual Percentage Rate, will be a beneficial loan for you. According to Lantern Credit by SoFi, “The APR for variable-rate loans can fluctuate as the interest rate changes according to index changes.”
What Is Interest Rate?
Think of interest rate as a yearly fee you pay on your mortgage or car loan. It is what lenders use to calculate your monthly payments each month. The higher your interest rate, the more you will pay in interest.
How APR is Calculated
APR is calculated by taking your interest rate and adding any loan-related fees. These fees typically include a setup fee, an annual fee, or discount points you pay to get a lower interest rate. For example, a home loan with an interest rate of 5 percent with a $300 annual fee will have an APR of 5.3 percent because 0.3 percent — three-tenths of 1 percent — is added for each year you borrow money.
How Interest Rates Are Calculated
Several factors are used to calculate an interest rate, including:
1) The currency involved (U.S. dollars or euros)
2) Whether it’s a fixed or variable-rate loan
3) If it’s a business loan or consumer loan (for example, a home mortgage)
Generally speaking, lenders take your credit score into account when calculating your interest rate; borrowers with good credit scores tend to get better rates than those with lower scores.
What’s the Difference Between APR and Interest Rate?
The annual percentage rate (APR) is a quick and easy way to compare loans or credit cards. It shows you how much interest you can expect to pay if you borrow money for one year.
So, APRs can tell you if your loan is cheap or expensive compared with other loans of a similar type. To use an example from mortgage lingo: People often use the terms APR and interest rate interchangeably — but they aren’t exactly synonymous.
Understanding the difference between an interest rate and an annual percentage rate (APR). An interest rate is what you pay on loans, while an APR includes other fees and your monthly payments.