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APR vs. Interest Rate: What’s the Difference?

Loan offers show two rates: the interest rate and the APR. They answer different questions, and mixing them up is one of the easiest ways to misjudge a loan.

By the Loan Calculator team · Updated

The short answer

The interest rate (sometimes called the note rate) is what the lender charges on the money you owe. It determines your monthly payment. The annual percentage rate (APR) expresses the yearly cost of credit, including certain fees as well as interest. In the US, the Truth in Lending Act and its Regulation Z require lenders to disclose the APR so that consumers can compare offers.

Why the APR is usually higher

Finance charges such as origination fees, discount points and some closing costs reduce the money you effectively receive, while your payments stay the same. The APR is the rate that makes your payments equal to the amount you actually received. More fees mean a higher APR.

Example: you borrow $10,000 at 10% for 36 months. The payment is $322.67. If a $500 origination fee is deducted, you receive $9,500 but still make the same payments. The APR comes out to about 13.56%, well above the 10% interest rate.

How to use each number

  • Use the interest rate to calculate your monthly payment and your amortization schedule.
  • Use the APR to compare the overall cost of loans with the same term and amount.
  • Use the total of payments to see what you will pay in total if you keep the loan to the end.

When APR can mislead

APR spreads upfront fees over the full loan term. If you expect to repay or refinance early, upfront fees cost you more per year than the APR suggests, so an offer with low fees and a slightly higher rate may be cheaper for you.

For adjustable-rate loans, the disclosed APR is based on assumptions about future rates, so it says less about what you will actually pay. And APR does not include every cost: for mortgages, items such as homeowners insurance and property taxes are not part of it.

APR vs. APY

APY (annual percentage yield) includes the effect of compounding and is used mainly for savings accounts. Loan APRs in the US are nominal annual rates: the monthly rate multiplied by 12. That is why a loan at 12% APR charges 1% a month.

Try it with your own numbers

Sources and further reading

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