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WHAT IS THE DIFFERENCE BETWEEN INTEREST RATE AND APR?

When looking for any type of loan, you must understand the difference between the interest rate on the one hand, and the annual percentage rate or APR on the other.


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Lisa Baker

3 years ago | 5 min read

When looking for any type of loan, you must understand the difference between the interest rate on the one hand, and the annual percentage rate or APR on the other. Both factors play an important role in the total amount you will pay over the course of your loan.

Although these terms are often used interchangeably, there are key differences that separate them. By knowing them, you will have a better idea of ​​how much your loan will cost you over time.

Read on to learn about the differences between interest rate and APR, which is more important, and where to find fair interest rates for your business loan.

How are the interest rate and the APR different?

The interest rate and the APR are NOT the same. Know what each one consists of:

Interest rate

The interest rate is the amount of interest that your lender charges you for giving you a loan. The interest rate is generally expressed as an annual percentage of the remaining principal balance on your loan.

Interest rates can be variable or fixed:

Variable interest rates change over time. Variable interest rates generally increase as you continue to pay off your loan.

Fixed interest rates , on the other hand, remain static throughout the term of the loan. If you have a fixed interest rate, your monthly payments will be the same for the entire duration of the loan.

Variable interest rates are often better if you plan to pay off your loan early, because you can take advantage of the low introductory rates. Fixed rates are preferable for long-term loans, as they are more predictable and are often cheaper in the long term.

Annual percentage rate (APR)

The annual percentage rate (APR) represents the total annual cost of borrowing money from your lender. This, in addition to the regular interest explained above, includes fees, closing costs, and any other expenses charged by your lender. In other words, the annual percentage rate or APR is a combination of the fees associated with your loan, and the interest on a loan. It is ultimately the total cost of the loan that you will pay annually. This total number is divided equally by the number of payment periods on your loan.

For example, if you apply for a loan, your interest rate could be 11%, but your APR could be 11.5%. Your APR is a more accurate figure for how much your loan will cost over time.

#CaminoTip
When comparing loans and determining your best option, it is better to compare APR rates rather than interest rates. If you compare only the interest rates, you may end up in a nasty surprise about the additional fees that you have not considered. Two loans may have the same interest rate but different APRs.

The so-called Federal Truth in Lending Act requires all lenders to disclose their APRs.

Interest rate and APR on different financing products

While interest rates and APRs can vary quite a bit, depending on the lender, most financial products have interest rates and APRs within the same range.

In the table below you have the average interest rates and average APRs on some of the most popular financial products: personal loans, business loans, mortgages, and credit cards.

Note: the APR includes additional fees such as origination fees, annual fees, closing costs, penalties, and other charges.

Average interest rateAverage APRPersonal loansfrom 5% to 36%from 10% to 28%Business loansfrom 2.55% to 5.14%from 4% to 13%Mortgages (30 years)from 3% to 7.84%from 3% to 7.84%Credit cards*from 13.24% to 22.99%from 13.24% to 22.99%

* Interest rate and APR on credit cards

For most financial products, APRs and interest rates are different, as we just saw. However, on credit cards , the APR and the interest rate are often the same.

Credit card companies generally express their interest rates as APRs. While some credit cards may have annual fees or other charges, these are almost never included in the APR as not all cardholders will incur the same fees.

Should you focus on the interest rate or the APR?

When looking for a loan, what is more important? The interest rate or the APR?

In almost all cases, it's best to focus on comparing the APRs of different loans.

APRs are there for a reason: to give borrowers an accurate idea of ​​how much their loan will cost over the entire term. APRs make it easy to calculate your monthly payments and the annual cost of the loan.

Remember that the interest rate does not reflect any additional fees. The interest rate can be misleading, since two loans you are comparing may have the same interest rate but have different APRs.

Generally, the only time you should compare the interest rates between two or more loans you are considering is if you plan to negotiate this rate with your lender. The interest rate provides a benchmark rate, which can be negotiated to lower it.

Ultimately, lower APR loans will cost you less over time, assuming the principal interest rate is fixed. As such, comparing APRs is more useful than comparing interest rates.

How to Calculate Interest Rate and APR

Do you want to calculate this data for yourself? Use these formulas:

Form it from the interest rate

Interest rate = [Interest paid / (Principal / time)] x 100

APR formula

APR = [(Rates + Interest) / Principal] / Number of days in the loan x 36500

Keep reading: How to reduce the interest on your business loan

Camino Financial: Fair Interest Rates and Low APR

Looking for a business loan with a fair interest rate and a low APR?

At Camino Financial, we offer microloans and business loans that help small business owners get the financing they need to grow their businesses. Our loan specialists will do everything possible to find the financing product that best suits your needs, ensuring that you receive the amount and terms that allow you to make your monthly payments comfortably and without straining your finances.

  • Between 12.00% and 40% (equivalent to 1% - 3.33% monthly). The maximum amount of our business loans is $ 400,000.
  • A low closing fee: between 5% and 6.99% of the loan amount, this results in a very low APR .
  • No collateral required
  • SSN is not required: your ITIN is enough
  • Our fixed rates are fixed as well as your monthly payments: this way you have control of what you pay at all times
  • Fast application and financing process, with a maximum time of 10 days
  • Free resources
  • Discounts on products for your business

To get a clearer idea, you can learn here how we calculate your interest rate .

In addition, there is a key factor to consider when it comes to our interest rates: when you have been paying your loan for 8 months, you can request a second loan for a higher amount and a lower interest rate. In other words, the interest rate you pay up front can drop significantly after a few months.

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Lisa Baker

I am a writer and share people about finance I also have a blog insurance noon and wanted to share about finance


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