Difference Between APR and Interest Rate

What is APR and what is the interest rate? Oftentimes, in banking, about credit cards and loans, both the APR and the interest rate are perplexed. Whether you apply for a new credit card or a loan, you will see both of them as they provide great information about how it returns to you.

In this article, we will study the APR (Annual Percentage Rate) and the interest, compare the two, and explain why these are important measures.

What is APR?

The annual percentage rate is the annual cost of a loan to the borrower. It’s expressed as a percentage so that you know how much it costs. It will provide the borrower with the necessary information about how much the loan itself is going to cost and enable the decision-making when looking at the market for lenders a lot easier.

What is the interest rate?

The interest rate is how much the lender will charge the borrower for using the credit or the loan received. For example, if the borrowed amount is $100 with a 3 percent interest rate, it means the borrower will pay back $103 for borrowing the money.

Comparison of Interest Rate and APR

If the interest rate of a loan is the cost of how much the borrower will pay in return, what’s the purpose of the APR? The annual percentage rate not only includes the interest rate, but also the fees and insurance. If a borrower gets a mortgage, he or she will also need to pay for insurance. That’s where the APR steps in for the borrower to see how much exactly is going to be paid in return. 

So everything from interest rate itself to insurance to closing costs to fees, APR holds within. Make sure to take a good look at the APR of different loans and credit cards before making your decision to handle your finances at a better level.