What are the differences between Interest rates & APR?

There are a lot of differences between interest rates & APR but the main difference is that annual percentage rate includes all the financing costs which occur on loans.

If you compare both loans it is be best way to evaluate the other options, which is why banks are required to disclose the APR when promoting a loan.

Interest rates & APR

Here are the options to consider for the differences between Interest rates & APR

The Basics of Interest Rate

The main differences between interest rates & APR is that interest rate on a loan is the amount

you pay in interest on your principal balance, expressed on an annual basis. A mortgage at 4.5 percent, for instance, means you pay 4.5 percent interest per year on your mortgage balance.

As you pay off the loan, the amount of interest decreases because the percentage of a lower principal balance is naturally less than it was the month before.

Know how to calculate the APR

APR stands for “annual percentage rate,” some people get confused and assume APR is annual and interest rate is not. In fact, APR is the entire financing charges on a loan, expressed on an annual basis.

The APR takes into account upfront closing costs or loan fees you pay to get the funds. On a home loan, for instance, you might pay $2,000 to $5,000, or even more, based on the value of your property.

You must understand the True APR

In some cases, the lowest APR gives your best value as a borrower. However, Lending Tree points out that you have to consider the actual life of the loan and not just the repayment period.

However, if the borrower pays off the loan in one or two years, the “real” APR is affected by the shorter repayment period. If the 4.7 percent loan has a much higher upfront finance cost than the loan with a 4.9 percent APR, that closing cost weighs more heavily when spread over one or two years rather than five.

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