What is the difference between an interest rate and the annual percentage rate (APR)?
I’m sure everyone has heard of the term mortgage, especially in the US, as it is a common medium among people who want some capital when they need to buy a house or property. When you talk about mortgage costs, there are two things to consider, one is the interest rate and the other is the Annual Percentage Rate, also known as the APR. Although both describe the same thing, they are not the same, which is why many borrowers get confused.
So what exactly is the difference?
1. So, let’s define the interest rate as the cost of borrowing the principal amount of the loan. It can be fixed or variable depending on the loan. This is often phrased as a percentage.
2. However, the APR is the larger figure that includes other costs such as broker fees, discounts and closing fees, etc., which is also a percentage.
3. Interest is set based on prevailing rates and the borrower’s credit rating. For example, the higher your credit score, the lower your interest rate will be. Your monthly amount is proportional to the interest charge and the principal balance, without considering the annual percentage rate.
4. The interest on a personal loan is diverse because it is only a proportion of the loan that you are charged for having a loan.
5. The APR, on the other hand, is decided by the lender, as it is made up of the lender’s fees and other costs that differ from lender to lender.
What is the major annual percentage rate?
Both interest and APR give you important information about a loan. But the comparison of a loan is very useful:
• You can compare fruit with fruit. All lenders must follow similar rules when calculating the APR (with a couple of differences we’ll mention in a moment). You have greater insight into the exact cost of an APR loan and can compare it to other loans.
• Know how much a loan will cost at a glance. Without a claimed APR, it’s a matter of working hard with the individual fees and adding them to the interest rate. That’s long.
• You can see how much you will pay in fees. Contrast the APR with the interest rate. The closer the two numbers are, the lower the amount of built-in fees.
Both the interest rate and the APR tell you how much you will pay for a loan. But the APR lets you know a lot more, so it’s usually more useful. However, you will want to compare them both.
Food to go
This is a valuable tool when comparing personal loans. Understanding its correlation to interest rate can help you make smart decisions when to shop for the loan that best suits your needs and budget.