APR vs. Interest Rate: What's the Difference? (2024)

If you are shopping for a mortgage or personal loan, you may have seen the terms “interest rates” and “APR,” or Annual Percentage Rate.

Many people think that APR is the same as interest rate, and the terms often seem to be used interchangeably. While these terms are related, they are not exactly the same. Knowing the difference will help you make a wise decision when considering whether a mortgage or other loan fits into your budget.

This article explains the difference between APR and interest rate. With this information, you will be able to compare lenders and choose affordable loans that will help you reach your financial goals.

Table of contents

  • What is interest rate?
  • What is APR?
  • Why do you need to understand both APR and interest rate?
  • How are interest rates calculated?
  • How is APR calculated?
  • How can you use APR and interest rates to help you choose a loan?

What is interest rate?

Simply put, interest rate is the percentage you pay to borrow the principal amount of your loan on an annual basis. The interest rate applies to the life of the loan, from the day it’s borrowed to the day it’s paid off.

Interest rates come in two varieties: fixed or variable. As the name suggests, a fixed interest rate stays the same throughout the life of your loan. With a fixed-rate loan, you always know exactly how much you owe every month and can better plan for each payment.

Variable interest rates are tied to a benchmark rate, like the prime rate. The prime rate can change periodically, depending on decisions by the Federal Reserve. Because of that, interest rates on loans may go up or down when the Fed moves to change its rate. A variable-rate loan creates some uncertainty about how much you will owe on your loan in the future.

What is APR?

As discussed above, an interest rate is what lenders charge for a loan. APR, which stands for annual percentage rate, is the total price of the loan expressed as a percentage. In addition to the interest rate, the APR includes other borrowing costs like lender fees.

APR and interest rate should be the same for loans that don’t charge fees. But when a loan also has origination fees and closing costs, the APR will be higher.

The Truth in Lending Act (TILA) requires lenders to explain both the interest rate and APR you will pay for your mortgage or loan. Look for this information on the Loan Estimate and in the Closing Disclosure.

Why do you need to understand both APR and interest rate?

Borrowers tend to seek the lowest interest rate when they are shopping for a mortgage or loan. But that may not give you a full picture of the amount of money you will owe.

The stated interest rate calculates only the cost of borrowing the principal. APR is actually a better reflection of the total lifetime cost of the loan, because it includes the base interest rate plus other expenses and fees.

A loan with a lower interest rate may not always be the cheapest option if you must also pay fees. These fees add up, so you will owe more over the life of your loan.

For example, let’s say you wanted to take out a $15,000 loan to be repaid over 72 months. If the loan has a 7.99% interest rate and does not charge any origination fees, the APR would also be 7.99%. In this case, the total cost of the loan would be $18,931.

If the loan instead has a 6.99% interest rate but charges fees at 6% of the loan amount ($900), those extra fees would bring the APR to 9.22% and the total cost of the loan to $19,308—a significant difference.

That’s why it’s important to look beyond interest rates. APR lets you make an apples-to-apples comparison between loans so you can see which loan is a better value, and how it will fit into your budget.

How are interest rates calculated?

Many factors are used to determine your interest rate, such as your credit history, application information, and the term you select.

Lenders see credit scores as an indication of creditworthiness. The higher your score, the more likely you are to pay back your debts. You might be able to lower your interest rate by boosting your credit health—though it will take time. Here are some steps you can take:

  • Pay your loans and credit card bills on time.
  • Don’t use too much of your available credit.
  • Pay down debt.
  • Don’t apply for new loans right before applying for a mortgage or other loan.

If you are considering a Discover® personal loan, keep in mind that the majority of Discover cardmembers get a better rate than non-cardmembers.

How is APR calculated?

To calculate APR, lenders factor in things like:

  • Interest rate:The amount of money you pay to borrow the loan principal.
  • Finance charges:These might include prepaid finance charges, points, and other fees.
  • Fees: Many lenders add fees on top of the interest rate they charge for loans. Most often, these include loan origination feesand closing costs. Depending on the lender and the type of loan, other fees, like prepayment penalties, could apply. A personal loan from Discover doesn’t come with any of these fees as long as you pay on time, helping to keep your APR in line with your interest rate.
  • Other factors: Your APR can also be affected by your loan’s origination date and when the first payment is due.

How can you use APR and interest rates to help you choose a loan?

As with any financial decision, make sure to get all the facts. Remember: APR is the total cost of borrowing, and it includes up-front fees and other charges. It’s a better, more complete picture of how much a loan costs than interest rates alone.

So always consider both interest rates and APR when you’re comparing lenders.

Discover Personal Loans doesn’t charge loan origination fees, or any other fee if you make your monthly payments on time. That means that your interest rate is also your APR. There are no other hidden fees.

The bottom line

Because interest rates and APR both come into play when shopping for a loan, it can be easy to confuse the two. But there are important differences.

While interest rates are part of understanding how much a mortgage or loan will cost, they don’t tell you everything. APR gives you a fuller picture of the total cost of a loan. With this information, you’re in a better position to find a loan you can afford and choose the terms that will fit within your budget.

Learn about the Discover Personal Loan Process

APR vs. Interest Rate: What's the Difference? (2024)

FAQs

What's difference between APR and interest rate? ›

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.

Is 1% APR a big difference? ›

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

What is the difference between APR and fixed interest rate? ›

A flat rate is based on the original amount borrowed, but APR will only take into consideration what remains. As a flat rate stays the same throughout the life of a loan you will not see your repayments go down.

Is APR a good way to compare loans? ›

APR gives you a better idea of the real cost of the loan. Because it includes fees, you'll have a better idea how much you'll actually pay when you compare APRs. Shop around for loan offers before choosing a lender.

What is APR for dummies? ›

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.

What is a good APR and interest rate? ›

A good credit card APR is a rate that's at or below the national average, which currently sits above 20 percent. While there are credit cards with APRs below 10 percent, they are most often found at credit unions or small local banks.

Do you pay both APR and interest rate? ›

While your interest rate is the percentage of interest you pay on a loan, your APR includes your interest rate along with any other fees or expenses you'll pay your lender.

Does 0 APR mean no interest? ›

If the borrowed money has a 0 percent APR, no interest will be charged on that money for a fixed period of time. Zero-interest credit cards, or 0 percent intro APR credit cards, allow cardholders to make payments with no interest on purchases, balance transfers or both for a set period of time.

Is 20% a bad APR? ›

So, what is a good APR for a credit card? Few of the most popular credit cards offer an interest rate below 16%. More commonly, you'll pay around 20% in interest, even if you've got an excellent credit score and especially if you're applying for any of the best rewards credit cards.

What is a good APR for a loan? ›

A good APR on a personal loan is typically one below 12 percent. But to qualify for it, you'll need a credit score above 670 and a stable source of income or a creditworthy co-signer that meets these requirements. Securing a low APR can save you thousands of dollars over the life of a loan, as shown in the table below.

What is an example of APR? ›

Here is an example:

If your current balance is $500 for the entire month and your APR rate is 17.99%, you can find your daily periodic rate by dividing your current APR by 365. In this case, your daily APR would be approximately 0.0492%. By multiplying $500 by 0.00049, you'll find your daily periodic rate is $0.25.

What is a good APR? ›

An APR is considered to be a good rate when it is at or below the national average, which currently sits at 20.40%, according to the Fed. This means that a credit card offering a fixed rate lower than 20.40% or a variable rate with a maximum of 20.40% would be considered a good APR for the average borrower.

Why is my APR lower than my interest rate? ›

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.

What is a good three-digit FICO score? ›

670-739

What credit score gets the best APR? ›

It might be exciting to aim for 850, the highest possible FICO score, but it really comes with no additional benefits. According to credit expert John Ulzheimer, a 760 will get you the best mortgage rate and a 720 score is all you need for the best interest rate for an auto loan.

What is 24% APR on a credit card? ›

An annual percentage rate (APR) of 24% indicates that if you carry a balance on a credit card for a full year, the balance will increase by approximately 24% due to accrued interest. For instance, if you maintain a $1,000 balance throughout the year, the interest accrued would amount to around $240.00.

What is a good APR on a 30 year mortgage? ›

The average 30-year fixed refinance APR is 7.37%, according to Bankrate's latest survey of the nation's largest mortgage lenders. On Sunday, April 28, 2024, the national average 30-year fixed mortgage APR is 7.37%.

Is 24% APR good or bad? ›

Yes, a 24% APR is high for a credit card. While many credit cards offer a range of interest rates, you'll qualify for lower rates with a higher credit score. Improving your credit score is a simple path to getting lower rates on your credit card.

What does a 25% APR mean? ›

Your nominal annual percentage rate, which is what is printed on credit card offers and monthly statements, reflects the cost of carrying a credit card balance in the absence of compounding. Supposing your credit card has a 25% APR and you carry a $100 balance for a year, you would owe $125 by year's end.

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