FAQs

Difference Between Interest Rate and APR

Difference Between Interest Rate and APR

A low interest rate is important in landing a good deal; however, there are additional factors that may make your loan turn out to be more expensive than the interest rate suggests. As you compare different loan options, it is necessary to consider both the interest rate and the APR. In fact, it is required by law that companies display the APR beside the interest rate so that potential borrowers have a more complete understanding of the cost of the loan.

Interest rate: This is the fee you are charged for borrowing money. The interest rate determines the size of monthly principal and interest payments. Rates typically vary by the type and size of the loan, the value of the home, and the borrower’s credit.

Annual Percentage Rate (APR): This is the total annual cost of the mortgage over the full term, shown as a yearly percentage. The APR includes closing costs, prepaid interest, fees and points. It is a useful tool for comparing mortgages because it expresses the true cost of a loan over time.