Many people use the terms “interest rate” and “APR” interchangeably, but the two have different meanings and the distinction is important. This infographic defines these two crucial financial terms, shows the difference between them, and gives insight on how to apply this information to real world situations.
The definition of an interest rate is pretty straightforward. The interest rate on a loan is the rate of interest the lender charges the borrower for the loan.
The definition of APR is a little bit more complicated, with some additional factors to be considered. The APR on a loan is the approximate annual cost of borrowing money from a financial institution represented as a percentage of the entire loan amount.
The APR includes the interest expense of the loan. It can also include:
- Closing Costs
- Loan Origination Fees
- Mortgage Insurance
- Broker Fees
- Rebates
Interest rate and APR are two things that you should absolutely consider if you’re looking into a possible loan. When comparing two loans, the loan with the lower interest rate will generally give you the better value as you pay less interest and therefore the loan costs less in total. Loans with low APRs cost less over 30 years, but they usually come with extra up-front fees. It can take years to break even on these expenses. When you’re evaluating a loan, it’s important to consider all of these factors – not just the interest rate and the APR, but any up-front fees or other expenses that you may be responsible for. Now that you know the differences between APR and interest rate, you’re better equipped to find the best loan deal for you!
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