APR vs interest rate; these are two terms that are often combined and refer to very similar concepts, but they have some other subtle differences when it comes to calculation.
When evaluating the cost of a loan or line of credit, it is important to understand the difference between the advertised interest rate and the annual percentage rate (APR), which includes any additional costs or fees.
The similarities and differences are very minimal, and normally people tend to get confused. However, we are going to explain the differences and also how each one works, both the APR and the interest rate, so that you can apply for your loan much more easily.
You may think that it is very difficult to understand but on the contrary, this is a topic that you will understand faster than you think.
The APR is the interest rate that is generated per year, an amount that must be paid by a person when applying for a loan or who receives a deposit in their account. This rate is used on everything from mortgages and car loans to credit cards. Basically, this is a percentage that is used to express the amount of money that a person must pay per year for the money borrowed.
When a person borrows money, or an entity, to pay for a car or a house, there is a cost for the privilege of borrowing that money, which is known as interest. This rate is based on the initial amount that was given to the borrower, that is, based on the total amount.
For example, if a person applies for a loan of $10,000, the APR is set at 5%, which means that person must pay around $500 USD per month until they can pay off the loan completely. This rate can be fixed or it can be variable, fixed rates are the most common.
The APR is important because that is what tells you how much you are going to pay for the loan in total, and this can also be a key factor in deciding on a credit or a card that you are requesting.
Banks calculate APRs on a daily or monthly basis; depending on the credit you have been granted.
This is the amount of interest that is owed according to each period of time, it is like a small part of the amount borrowed or deposited, this initial amount is known as the principal sum.
The total interest on the amount that was loaned depends on the principal amount, the interest rate, the frequency of compounding, and the period of time during which the money was loaned.
This rate is defined as the proportion of a borrowed amount that the lender charges the borrower as interest, this is expressed as an annual percentage. The interest rate is considered as a preference index of one dollar of present over one dollar of future income.
The interest rate usually varies according to several factors such as
- The directives that the government gives to the central bank.
- The currency in which the amount of money was loaned.
- The maturity of the investment.
- The probability of default
- Supply and demand in the market.
- The guarantee.
- The compensatory balance.
Both work in a somewhat similar way. However, these are terms that have some differences in terms of how they work as such. For example, When you get a mortgage you must take into account the interest rate or also the APR.
|APR (Annual Percentage Rate)||Interest Rate|
|Is the annual cost of a loan for a borrower, including the fees.||It refers to the annual cost of a loan to a borrower and is expressed as a percentage.|
|The APR is expressed as a percentage, however, it includes other fees such as mortgage insurance, and most closing points, discount points, and loan origination fees.||It is susceptible to change, especially with a variable loan.|
|It is intended to provide more information about what is being paid, and it is a law for lenders that the APR is disclosed to the consumer.||The credit score is a crucial factor to determine the interest rate you get when requesting a loan.|
|It can serve as a basis for comparing certain loans and verifying which one is the best.||Lenders are willing to negotiate the interest rate.|
Our recommendation to you is to evaluate carefully when looking at the rates offered by lenders. You should compare the APR of one loan to the APR of other loans for a fair comparison of the total cost.
You should also make sure that you are aware of the interest rate before requesting a loan.
When you are taking a loan or any other kind of credit, you need to be aware of both the APR and the Interest Rate. Thanks to this, you are fully aware of how much you are going to cancel in total annually and if the interest charged to you is fair or not.
For example, when you are going to a cash advance direct lender to request a loan and you know your numbers, the lender will be prone to give you fair rates and fees.
Knowing the APR will help you know what you are paying for, as well as how much you are paying for the initial loan. It will help you to make accounts more secure and also to know each of the amounts which you are going to start paying from time to time.
You must take these and other factors into consideration when requesting loans since they can be factors that play against you in the future. The more informed you are about your loans knowing the interest rate and APR, the better you can manage your personal finances.