APR is the cost of credit expressed as an annual percentage rate. An interest rate is the cost of borrowing the principal loan amount and can be variable or fixed depending on the type of the loan. While both are expressed as percentage rates, the APR is the true cost of credit and may include applicable fees like an origination fee. With a personal loan, the APR and interest rate could be the same if fees aren’t included in the terms of the loan.
What Are Interest Rates?
An interest rate is the cost of borrowing the principal loan amount and can be variable or fixed depending on the type of the loan.
Interest rates can vary including but not limited to factors like the type of the loan, the lender and your creditworthiness. Generally speaking, you may qualify for a lower interest rate on a loan if you have a positive credit rating and a good payment history. Alternatively, you could be charged a high-interest rate if the lender considers you a high credit risk.
What Are Annual Percentage Rates?
The term APR, or annual percentage rate is important to understand when you’re applying for a personal loan. Understanding how APR is calculated and applied can help you make informed decisions when you need to borrow money.
The annual percentage rate or APR is the amount of interest expressed as a yearly rate. Interest includes fees, such as an origination fee. You may be able to obtain a low APR by building and establishing good credit.
How APR is Calculated for Personal Loans
With a personal loan, the APR is a rate of interest expressed as a yearly percentage for the duration of the loan including the origination fee. A personal loan APR is fixed which means your interest rate won’t change over the term of the loan, and you pay the loan back in equal, monthly installments.
How Personal Loan APR differs from Credit Card APR
This differs from credit card issuers that calculate APR using an index rate such as the prime rate, which can be variable or the London Interbank Offered Rate (LIBOR). A variable interest rate on a credit card could cause your interest rate to change-making your monthly payment harder to predict.
Can a Personal Loan Save Me Money on Interest?
Depending on your financial situation, a personal loan could help you save money on interest — especially if you consolidate high-interest rate credit card debt. Take inventory of all the debts you owe, and make a list of your outstanding balances, interest rates, and monthly payments before you apply for a personal loan.