What’s the Difference Between APR and Interest Rate?
When comparing personal loans or installment loans, you’ll likely see both an interest rate and an Annual Percentage Rate (APR) listed. While these terms are related, they are not the same thing.
Understanding the difference between APR and interest rate can help you compare loan offers more accurately and avoid unexpected borrowing costs.
Quick Answer
- Interest rate is the percentage charged for borrowing money.
- APR (Annual Percentage Rate) includes the interest rate plus certain fees and finance charges, providing a more complete picture of the total cost of the loan.
When comparing two loans, APR is often the better number to compare because it reflects the overall cost of borrowing rather than just the interest charged.
What Is an Interest Rate?
An interest rate is the percentage a lender charges on the amount you borrow (known as the principal).
For example:
- Loan amount: $2,000
- Interest rate: 18%
The interest rate determines how much interest accrues on your loan over time according to the loan agreement.
The interest rate does not necessarily include additional loan fees, which is why it doesn’t always represent the full cost of borrowing.
What Is APR?
Annual Percentage Rate (APR) represents the yearly cost of borrowing and generally includes:
- Interest charges
- Certain lender fees
- Origination fees (if applicable)
- Other finance charges required by the loan agreement
Because APR includes more than just interest, it usually provides a better basis for comparing different loan offers. If two lenders advertise the same interest rate but one charges additional fees, that loan may have a higher APR.
APR vs. Interest Rate: Side-by-Side Comparison
| Interest Rate | APR |
| Cost of borrowing money | Total annual borrowing cost |
| Based primarily on interest | Includes interest plus certain fees |
| May appear lower | Often higher than the interest rate |
| Useful for calculating interest | Better for comparing loan offers |
Why Is APR Usually Higher?
Imagine two lenders each offer a loan with a 15% interest rate.
Loan A
- 15% interest
- No origination fee
Loan B
- 15% interest
- $100 origination fee
Although both loans have the same interest rate, Loan B’s APR would typically be higher because it includes the additional financing cost. This is why borrowers should look beyond the interest rate when comparing loans.
Which Number Should You Compare?
If you’re shopping for loans, compare both, but pay close attention to the APR.
The APR can help answer questions like:
- Which loan costs less overall?
- Does one lender charge additional fees?
- Am I paying more than I realize?
Two loans with identical interest rates may have different APRs because of differences in fees or financing costs.
What Else Affects the Cost of a Loan?
APR and interest rate are important, but they’re only part of the picture. You should also consider:
- Loan amount
- Repayment term
- Monthly payment
- Total amount repaid
- Payment schedule
- Whether there are optional or required fees
- Whether early repayment is allowed
Reviewing the complete loan agreement helps ensure you understand your repayment obligations before accepting a loan.
Why APR Matters for Installment Loans
Installment loans are repaid through scheduled payments over a set period of time. Looking at the APR can help borrowers understand the overall cost of financing, especially when comparing loans with different fee structures.
Keep in mind that the loan with the lowest monthly payment isn’t always the least expensive overall. A longer repayment term may reduce monthly payments while increasing the total amount of interest paid over the life of the loan.
How Uprova® Helps Borrowers Understand Loan Costs
At Uprova, we believe borrowers should understand the cost of a loan before making a financial decision. During the application process, eligible applicants receive loan disclosures outlining important terms, including:
- Annual Percentage Rate (APR)
- Finance charges
- Total payments
- Payment schedule
- Loan term
- Any applicable fees required by the loan agreement
Reviewing these disclosures carefully can help you decide whether a loan fits your budget and financial goals.
Frequently Asked Questions
Is APR always higher than the interest rate?
Not always, but it often is. If a loan includes finance charges or certain fees in addition to interest, the APR is generally higher than the stated interest rate.
Why do lenders show both APR and interest rate?
Federal lending regulations generally require lenders to disclose the APR so borrowers can more easily compare the total cost of different loan offers.
Should I compare APR or monthly payment?
Compare both. A lower monthly payment may result from a longer repayment term, which can increase the total amount repaid over time. APR helps you compare the overall borrowing cost.
Does a lower interest rate always mean a cheaper loan?
No. Two loans with the same interest rate can have different APRs if one includes additional fees. Looking at the APR provides a more complete comparison.
Can my APR depend on my credit profile?
Yes. Depending on the lender, your credit history, income, loan amount, and other underwriting factors may influence the APR you’re offered.
The Bottom Line
While the interest rate tells you how much interest you’ll pay on the money you borrow, the APR provides a broader view of the loan’s total cost by including interest and certain finance charges.
When comparing loan offers, reviewing both numbers—along with the repayment schedule, loan term, and total payments—can help you make a more informed borrowing decision.
If you’re considering an installment loan, understanding these terms can make it easier to choose a loan that fits your budget and your financial needs.
