APR vs Interest Rate – What is the Difference?

By: Branden S.

APR vs Interest Rate

In the process of looking for a loan to work with, you’ll come across lenders advertising their best APR vs interest rate. This is a major requirement for lending organizations to show both rates to customers to give them a sense of all the respective interest rates and lending fees.

But what is the difference between APR (or Annual Percentage Rate) and interest rate?

Well, in today’s post, you’ll get to know the difference when choosing a loan, and if a higher or lower APR will be better for you. You’ll also get to know if APR is higher than the interest rate when getting a loan.

So if you’re currently in the process of getting your first loan offer, then you’ll love the guide; let’s dive right in!

Understanding Interest Rate

The interest rate on a loan offer is simply the money that it costs you to borrow on that offer.

A loan with simple interest can be applied in various intervals (daily, monthly, or yearly), all dependent on the loan agreement, and not considering any other additional fee that relates to the offer. These kinds of loans usually apply the interest rate to only the principal balance.

But a loan with compounding interest has its interest rate applied to the balance and the interest accrued over time.

Understanding APR Rate

An Annual Percentage Rate (APR) is a calculation of both the interest rate on a loan offer and the loan’s finance charges, all expressed as an annual cost for the entire period of time of the loan offer. Simply put, it is the overall cost to borrow money as expressed as an annual rate.

This is usually higher in cost than the interest rate because it also includes all applicable lenders’ fees. Depending on your loan type and terms, fees such as administrative (or origination fees), application, and closing fees may be included in your loan’s APR.

A loan offer with equal amounts of interest rate and APR simply implies that such loan offer does not have any additional fees attached to it.

A loan’s APR gives you the most sense of the true cost of the loan offer, but note, it does not give you a clear idea of how much you’ll be accruing in fees for any potential late payment on the loan offer (or prepayment penalties).

Application of APRs in Mortgages, Personal Loans, and Credit Cards

Understanding exactly what goes into an APR goes a long way in helping you to compare various loan and credit card offers.

This is because, and as discussed earlier, APRs include both interest rates and additional fees associated with a loan offer, which in turn can help you know the total cost of your loan or credit card offers, and help you decide which offer best suits you.

Mortgage Loan APRs

In the light of mortgages, the APR may take into account the:

  • Mortgage points
  • Broker fees
  • Discount points
  • Mortgage insurance
  • and all closing costs

However, it may not necessarily include some required mortgage lenders’ fees (such as a credit check fee).

Also, an adjustable-rate mortgage (ARM) might not reflect the loan’s maximum potential APR in the mortgage’s initial APR. This sometimes can be lower than the interest rate on the offer.

The APR on an adjustable-rate mortgage (ARM) can only be known on paying the loan offer.

Personal Loan APRs

A personal loan is usually a fixed rate short-term loan, which implies that your interest rate remains constant over the total duration of the loan offer.

On the other hand, the APR on a personal loan covers both your interest rate and any additional loan fees on the offer such as your origination fees. In most cases, personal loan APRs may be a bit higher than its interest rate, but in cases where there are no additional loan fees, then both the personal loan APR and interest rate remain the same.

APR vs Interest Rate

Credit Card APRs

Credit card APRs are quite different in the sense that, it defines the interest rate that you (the customer) will pay when carrying a balance from month to month. That simply goes to say that if you are faithful with your monthly bills and pay them in full, then you will not accumulate any interest on your credit card.

This is usually why both credit card APRs and interest rates are the same.

And also, with credit cards, there are no extra fees (such as cash advance, late payment fees, balance transfer, etc.) involved. But still, a credit card can accrue some penalty APRs which usually apply to a user’s entire current balance if his or her payment is late.

This is also one major factor that accounts for different APRs for different types of credit card transactions or balances.

APR vs Interest Rate FAQs

#1: Are APRs Higher than Interest Rates?

Yes, APRs are usually higher than interest rates, and this is common because interest rates often constitute a component of APRs.

This can also be related to the additional fees that an APR may accrue.

#2: What is a Really Good Personal Loan APR?

Specifically speaking, there’s really no best fit for a good personal loan APR. Rather, it’s more important to consider your personal finances when looking for a good personal loan APR to work with.

#3: Is a Higher or Lower APR Better?

When comparing cash advance loan offers, a lower APR usually signifies a loan with a much lower total cost of borrowing. Thus, in most cases, a lower loan APR may seem a due fit for you, but still, this shouldn’t be the only metric for you to consider when taking out a loan.

You also need to confirm that you are working with a reputable lender to ensure your comfort with the repayment of your loan offer.


Basically, whenever you take up a loan offer, lenders get rewarded for their services via both the designated interest and APR rate on the agreed loan offer.

A high or low loan APR doesn’t really mean that such a loan offer is the best for you – it all depends on your loan type, purpose, and lender.

Would you rather take up a loan offer with a relatively low APR and have a lender calling and messaging you all day, even prior to when your loan offer is due?

All these constitute a major factor to consider when deciding on a loan offer to take out for your lending purpose.

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