APR vs. Interest Rates: What's the Difference?
APRs and interest rates are often mistaken to mean the same thing when it comes to loans. Here is where they differ:
APR stands for “annual percentage rate.” It is the annual cost a borrower will incur when obtaining a loan including the fees associated with the loan. The fees can be including but not limited to closing costs, origination fees, insurance fees, broker fees, and deduction points on the loan. APR is frequently used to compare loans because everything is included in that number and the disclosure of APR rates is closely regulated. Overall, the APR gives a borrower a clearer look at how much money they will be spending if they choose that loan over another loan.
An interest rate is the annual cost of a loan to a borrower but it does not include any fees associated with obtaining the loan. This rate depicts the cost that will be paid each year to borrow the money but does not take into consideration the other costs necessary to obtain the loan. This rate is based on the principal loan amount.
So why are both listed? Interest rates depict how much you will pay to borrow the actual loan amount. But for a better overall picture, borrowers will want to pay attention to the APR. Comparing loans at different institutions? Compare the APR on the same type of loan. From there, you will gain an accurate comparison of the difference in total costs you will incur and can make an educated decision from the results.