Interest Rate vs. APR: Learning the difference between APR and interest rates can save you money on your loans. When applying for a loan, it’s a good idea to sit down and know the difference between the interest rate and APR. But aren’t they the same? You see, although you might not be able to pick them apart and distinguish the two terms, they are different. So good thing you’re here because not knowing the difference could result in you having higher monthly payments than you would have expected. Interest Rate vs. APR

To ensure that you’re not paying more than you should and that you’re saving the most money prior to taking out a loan, it’s important to educate yourself about interest rates. As you browse through this post, you’ll find answers to questions like “what is an APR?” and “what is the difference between interest rates and APR?”

Editor’s Note: Interested in finding the best credit card(s) for you? Be sure to check out our compiled list of the best credit cards! Not sure if your credit score is good? See our post on what is a good credit score! Interest Rate vs. APRs

Interest Rate vs. APR Interest Rate vs. APR

• Interest Rate Explained Interest Rate vs. APR
  • So what is an interest rate? When you borrow money, you’ll be charged interest in addition to the principal. The interest rate is expressed as a percent of the total loan amount and your lender will add it to the principal to calculate the monthly payments you’ll need to make to pay off the loan by the end of its term.
  • A daily interest formula calculates the amount of interest that accrues on your loan each month. To arrive at this number, multiply your loan balance by the number of days since your last payment, and then multiply that number by your interest rate.
• APR Explained Interest Rate vs. APR
  • What does APR stand for, what does APR mean, and how does APR work? APR is short for annual percentage rate and it refers to your interest rate for an entire year instead of on a monthly basis. Your APR consists of not only your interest rate but other charges that might include document preparation, underwriting, loan processing and application fees. Because of those added fees, a loan’s APR is typically slightly higher than the advertised interest rate.
  • Here’s an example of how to calculate an APR: If you take out a loan for $100,000 with a 5 percent interest rate, your yearly interest would equal $5,000. To find the APR, assume fees will run you $3,000. Add those fees to the mortgage amount, which equals $103,000 — and you’ll be paying $5,150 in interest at 5 percent. To find the APR, divide the $5,150 by the original loan amount of $100,000, which equals an APR of 5.15 percent.
• Interest Rate vs. APR Interest Rate vs. APR
  • To better understand the terms, examine the similarities and differences between an interest rate and an APR. Once you learn what they are, you’ll be able to sort out what you’ll really be paying in interest, monthly and yearly.
  • Similarities: Interest Rate vs. APR
    • Both vary from lender to lender. Interest Rate vs. APR
    • Both can be used to compare loans. Interest Rate vs. APR
    • Both are expressed as percentages. Interest Rate vs. APR
  • Differences: Interest Rate vs. APR
    • An APR includes fees but an interest rate does not.
    • An interest rate is typically lower than an APR.
    • An interest rate shows the current cost of the amount borrowed but the APR represents the total cost over the course of the loan.
• Know the Rate Terms to Avoid Costs Interest Rate vs. APR
  • The Federal Truth in Lending Act requires all lenders to clearly display the terms of the loan, including the interest rate and APR. Borrowers who don’t know the difference between APR and interest rate might take on higher payments than they can afford. And that could translate into a repossessed car or a foreclosed home.
• APR and Credit Cards Interest Rate vs. APR
  • Credit cards carry revolving debt and their interest is often compounded, which an APR doesn’t factor in. To compare credit cards and get the best deal, look for the annual percentage yield, which reflects the total amount of interest you’ll pay on an account. The APY is based on the interest rate and the compounding frequency for a 365-day period.
  • When you’re ready to borrow money, do your homework. Read all mortgage, loan and credit card contracts to see how much you’ll be paying over the life of the loan — and ask questions if you don’t understand a term. Make sure you have all the facts you need to make an informed decision.

Author’s Verdict

So hopefully this guide on Interest Rate vs. APR and How Not Knowing the Difference Can Cost You helped you quite a bit. Here’s another personal tip you can use to subside your loan fees while making payments. I would open a new interest bearing account such as a savings account, CD, money market account, Roth IRA, etc. For some of these accounts, see our best savings account section. With this method, you’ll be earning interest on the funds you leave in one of the accounts listed to earn extra income throughout the years. Majority of the time, the choice of financing a car at $20K instead of purchasing a car straight cash for $19K is the better option. Financing your car may be your best option if the interest rate you earn on your savings is higher than the after-tax cost of paying full cash. In addition, keep in mind that while you do free up your monthly budget by eliminating a car payment, you may also have depleted your emergency savings to do so. Looking to add a little extra income each year? If so, see our list of the best bank deals, bonuses, and promotions!

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