Borrowers often center their attention towards low rates of interest at the time of personal loan application. We understand the interest rate is important, however there’s another factor which needs due attention which is the annual percentage rate, or APR.
Both the interest rate and APR provides understanding into how much you’ll actually pay over the tenure of your personal loan, so it’s imperative to know them equally well. Here you should know the difference between the APRs and interest rates properly.
What is an Interest rate?
An interest rate is essentially the amount of interest payable to a lender in return for giving out a loan. Usually, it’s the annual percentage of the outstanding principal payable with every installment.
Lending institutions build their interest rate on several factors like the credit score, debt to income ratio which calculates your monthly payments against the income you earn. Conventionally, higher your credit score, lower is your debt to income ratio.
Interest rate does not consider any other form of charges that maybe included in your personal loan.
What is “APR”?
APR or annual percentage ratio is the personal loan’s annual percentage rate, and provides the total cost of borrowing in a year. Along with the interest rate, the lender will charge an annual processing fees for your loan application, since APR takes fees and interest rate into account. All lenders must disclose a loan’s APR according the legal procedures.
What is the main difference between an APR and interest rate for personal loans?
The difference is strikingly visible when you take fees into account.
So, does this imply that a zero fee personal loan is always the preferred choice?
Obviously, not all lending institutions charge an origination fee, however a zero fees cannot equal low costs. This is because zero fee scenario may come with higher interest rates.
In our shown example, the first loan offer comes fee of cost at a 35% interest rate, while the second offer includes an origination fee at 15% rate of interest. The outcome is that the second loan saves the borrower a larger amount than the first loan offer.
Its Beneficial to Understand Interest rate vs. APR
The best to remember is that whenever you’re shopping for a personal loan, carefully read the loan documents, have all your queries answered and do your calculations well.
Interest rate is a good way to determine your instant loan cost and monthly payments, while the APR can provide insights into how much you’re supposed to pay as fees plus interest in a fixed term of loan. An elaborate understanding of the numbers can really help to save a few hundreds and thousands over the loan term.
So, if you’re thinking of taking out a personal loan? Wait up! Just before you furnish your consensus to the loan agreement, ensure to do the necessary research to know how much will it cost you in entirety.
The annual percentage rate, or APR, and the interest rate are the two major factors in the repayment of your instant loan. And these figures may or may not be equal, hence exercise your mind!