When shopping for loans, you will encounter two important numbers: the interest rate and the APR. Understanding the difference between them is crucial for comparing loan offers and knowing the true cost of borrowing.
What Is an Interest Rate?
The interest rate is the percentage of your loan principal that the lender charges you to borrow money. It represents the basic cost of borrowing before any additional fees. For example, if you borrow one thousand dollars at a ten percent interest rate, you would pay one hundred dollars in interest per year on that principal.
What Is APR?
APR stands for Annual Percentage Rate. It includes the interest rate plus any additional fees and costs associated with the loan, expressed as a yearly rate. This gives you a more complete picture of what the loan will actually cost you. The APR is typically higher than the interest rate because it incorporates these extra costs.
Why APR Matters More
When comparing loan offers, the APR is the more important number to look at. Two loans might have the same interest rate but different APRs due to varying fees. The loan with the lower APR is usually the better deal because it reflects the total cost of borrowing. Federal law requires lenders to disclose the APR so borrowers can make apples-to-apples comparisons.
What Is Included in APR?
Depending on the type of loan, APR may include origination fees charged by the lender, closing costs for mortgages, discount points, mortgage insurance, and certain other finance charges. However, some costs like late fees and prepayment penalties are typically not included in the APR calculation.
Fixed vs Variable APR
A fixed APR stays the same throughout the life of your loan, making your payments predictable. A variable APR can change over time based on market conditions, which means your payments could increase or decrease. For budgeting purposes, many people prefer the stability of a fixed APR.
Using APR to Compare Loans
When you receive multiple loan offers, line them up and compare the APRs. Remember to also consider the loan term, as a loan with a lower APR but longer term might cost more in total interest. Use a loan calculator to see the total amount you would pay under different scenarios.
Transparent Pricing at Fig Loans
We clearly disclose your APR before you accept any loan offer. No hidden fees.
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