APR vs. Interest Rates
When it comes to your mortgage, credit card, automobile, or any other loan, the interest rate is everything. The interest rate is what you’re charged to borrow money and is expressed as a percentage. The interest rate of your loan determines how much you pay over the life of the loan. A low interest rate will help keep monthly payments affordable, while a high one can make that same loan more costly overall. When looking for any type of loan, it is important to understand the full picture.
Interest Rates
The interest rate describes the amount a lender charges for a loan. Put differently, it is how much it will cost you to borrow money. Interest rates are determined by a several factors. Inflation, economic conditions, and the lender you choose all play a role in determining rates. Additionally, your financial profile has a lot to do with the rate you may qualify for. Your credit history, debt-to-income ratio, and other factors will play a role in your interest rate. Those with higher credit scores generally receive lower interest rates.
APR
The Annual Percentage Rate (APR) is the effective interest rate of a loan after accounting for the interest rate and fees, such as points and origination fees. When comparing loan offers, it is crucial to compare APRs to get a clearer picture of the true cost of the loan. APR is a standard calculation used by lenders to help borrowers compare different loan options. A loan with a low interest rate with high fees may cost a borrower more over time than a loan with a higher interest rate but lower fees. APR allows you to compare loans with different fees, rates, and terms.
Why is APR higher than the interest rate?
The APR is higher than the interest rate because it considers all the costs of borrowing, while the interest rate only describes the rate at which interest will accrue. APR is the interest rate plus other costs.
Summing It Up
The interest rate of your loan measures only how much interest will accrue on your balance. APR accounts for interest plus other fees that you must pay. When comparing loans, the APR provides a clearer picture of the full cost of borrowing.
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