What is the difference between a loan interest rate and the APR? | Consumer Financial Protection Bureau (2024)

FAQs

What is the difference between a loan interest rate and the APR? | Consumer Financial Protection Bureau? ›

A loan's interest rate is the cost you pay to the lender for borrowing money. The Annual Percentage Rate (APR) is a measure of the interest rate plus the additional fees charged with the loan. Both are expressed as a percentage.

The main difference between interest rate and APR is that interest rate represents the cost you'll pay each year to borrow money, while APR is a more extensive measure of the cost to borrow money that takes additional fees into account.

APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. Simple interest is when the interest on a loan or investment is calculated only on the amount initially invested or loaned.

Both terms represent the cost of borrowing money. But they aren't exactly the same thing. The primary difference between APR and interest rate is that the APR reflects the interest rate plus additional costs that may apply to your loan. In that sense, APR may better reflect the true cost of borrowing money.

For example, if there are no fees and the rate is fixed, the ARP will equal the rate. APR is a way to show you how much it costs to borrow money at your given interest rate with the particular closing costs and fees associated with a mortgage loan.

Each month the accrued interest will be added to the principal due in your monthly payment until you pay the principal back in full. The APR includes any origination fee or other costs that may be added when signing your loan agreement in addition to the interest rate.

APY represents the amount of money you will earn on your deposits over the course of a year, taking into account compound interest. Interest rate, on the other hand, is the percentage at which your money will accrue interest, without considering compounding.

Interest is what you pay for borrowing money, and what banks pay you for saving money with them. Interest rates are shown as a percentage of the amount you borrow or save over a year.

When applying for a loan, we must consider two things: the nominal interest rate (NIR), which is the price we pay for the money we will borrow; and the annual percentage rate (APR), which includes the fees, loan term and the NIR. Here, we'll learn all about how these concepts affects a loan or mortgage.

There is a difference between interest rates and APR

Interest rates account for just one potential cost of having and using a credit card. APR includes other standard fees, meaning it gives you a more complete picture of the costs.

Why is my APR lower than my interest rate? ›

In general, the more fees and expenses are heaped onto a loan, the higher the APR. If a loan has no additional fees, the interest rate and APR will be the same (unless you are choosing to defer payments, in which case the APR may be lower than the interest rate — more on that below).

APR is the price you pay for a loan. It typically includes interest rates and fees. APR can sometimes be the same as a loan's interest rate, like in the case of most credit cards. APR may be fixed or variable, meaning the rate may stay the same or it might change with market factors.

The amount of interest that accrues (accumulates) on loans from month to month is determined by a simple daily interest formula. This formula consists of multiplying the loan balance by the number of days since the last payment, times the interest rate factor. It's important to keep finances healthy for many reasons.

An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.

It's a standard compound rate, which means, it takes into account interest you'll pay on top of interest, and any annual fees the card has. Although the actual rate you receive depends on your application, the Representative APR can give you an idea of the rate most customers will receive.

Types of APRs

The credit card issuer may charge one APR for purchases, another for cash advances, and yet another for balance transfers from another card. Issuers also charge high-rate penalty APRs to customers for late payments or violating other terms of the cardholder agreement.

An APR (Annual Percentage Rate) of 99.9% on a loan means that the borrower will be charged an interest rate of 99.9% per year on the amount borrowed [1]. This means that for every $100 borrowed, the borrower will have to pay back $199.90 in total over the course of a year [1].

The APR for an ARM will sometimes be lower than the interest rate. This can happen in a declining interest rate environment when lenders can assume in their advertising that your interest rate will be lower when it resets than when you take out the loan.

Avoid loans with APRs higher than 10% (if possible)

"That is, effectively, borrowing money at a lower rate than you're able to make on that money."

A mortgage loan's annual percentage rate (APR) is usually higher than its interest rate because it includes all the costs of borrowing and not just interest charges. Other costs incorporated into a loan's APR may include closing costs, broker fees, points and other charges you incur when getting the loan.