APR vs. Interest Rate: What’s the difference? Is it important to know? How do lenders calculate both? Which one should I use? These are all great questions!
APR vs. Interest Rate: Understanding the Difference Can Save You Money
Interest RateThe nominal interest rate, or advertised rate, refers to the percentage you must pay for a specific period to borrow money from a lender. The interest rate is represented as a percentage, and it can be either fixed or variable.
A fixed interest rate will never change, regardless of whether external factors that generally influence interest rates to change, like financial markets.A variable interest rate, on the other hand, can vary during your loan lifetime.
The Annual Percentage Rate, or APR, includes the interest rate of the loan and all other costs involved in it, such as fees, closing costs, discount points, etc.
That often meant averages of 10% for mortgages and up to 500% annual interest rates for private loans. In many cases, lenders use lower interest rates as bait, but high fees were hidden and not disclosed to consumers upfront.
Lenders calculate your interest rate using your data. Every lender has its formula to calculate the interest rate, and so you will most likely get five different rates from five lenders.
Things are a little different when it comes to APR, and unfortunately, you have less control over it, as your lender controls all of the fees that, along with your interest rate, make up your APR.
So now you understand what the interest rate and APR are. But, which one should you go by when comparing loans? Unfortunately, the answer is, it depends.