APR vs Interest RateWhen comparing loans, credit cards, or mortgages, you’ll often see two numbers: the interest rate and the APR (Annual Percentage Rate). While they may look similar, they are not the same, and misunderstanding the difference can cost you money. The interest rate is the amount a lender charges you to borrow money. The Annual Percentage Rate (APR) reflects the interest rate plus any additional loan fees, all expressed as a percentage. This guide explains APR vs interest rate in simple terms, with examples, formulas, and practical tips to help you choose the best loan. 
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What Is an Interest Rate ?The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It represents what the lender charges you just for the money itself, not including most fees.The interest rate is calculated only on the principal, is usually lower than the APR, can be fixed or variable, and does not include most loan fees. ExampleIf you borrow $10,000 at a 5% interest rate, you’ll pay interest based only on that 5%, excluding additional costs.What is APR (Annual Percentage Rate)?The APR (Annual Percentage Rate) shows the true yearly cost of borrowing. APR represents the yearly cost of borrowing, including interest and fees. Like an interest rate, it is expressed as a percentage, but unlike the interest rate, it also includes additional charges such as mortgage insurance, most closing costs, discount points, and loan origination fees. The APR offers a more accurate view of the total cost of borrowing. Indeed APR gives a clearer picture of the true cost of a loan.APR spreads all borrowing costs over the life of the loan and presents them as an annual percentage. It reflects the total cost of the loan, is always equal to or higher than the interest rate, and is the most reliable metric for comparing loan offers. APR is the effective annual rate that equates the loan’s net proceeds with the present value of all future payments. Because it includes fees, it provides a more accurate measure of borrowing cost than the interest rate. ExampleYou can find after an example of APR. You take out a $20,000 loan with a 5.0% interest rate over 5 years and the lender charges $1,000 in fees. When those fees are included and spread over the life of the loan, the APR becomes 7.13%.Even though the interest rate is 5.0%, the APR is higher because it reflects the true annual cost of borrowing, including fees. Below is a step-by-step breakdown of how APR is calculated, illustrated with a simple example. Example Loan Information Loan amount: $20,000 Interest rate: 5.00% (fixed) Loan term: 5 years (60 months) Loan fees: $1,000 Step 1: calculate the monthly interest rateDivide the annual interest rate by 12: 5.00% ÷ 12 = 0.4167% per month = 0.004167 (approximately equal to) Step 2: calculate the monthly payment (based on interest only)The monthly payment for a loan is calculated using the formula: P = (r × L) / (1 - (1 + r)-n) P = Monthly payment L = Loan amount r = Monthly interest rate (annual rate ÷ 12) n = Total number of payments P = Monthly payment L = Loan amount ($20,000) r = Monthly interest rate (annual rate ÷ 12) n = Total number of payments Plug in the Numbers Annual interest rate = 5.00% Monthly rate: r = 0.05 ÷ 12 = 0.004167 Loan term: n = 5 × 12 = 60 Apply the Formula The monthly payment formula: P = (r × L) / (1 - (1 + r)-n) Plug in the values: P = (0.004167 × 20000) / (1 - (1 + 0.004167)-60) P = 83.34 / (1 - 0.778) P = 83.34 / 0.222 P ≈ 377.42 Final Monthly Payment Monthly payment = $377.42 (approximately equal to) This amount is calculated using only the interest rate and does not include fees. Step 3: account for loan feesWhile the loan amount is $20,000, the amount you actually receive is: $20,000 − $1,000 in fees = $19,000 APR calculations treat these fees as part of the borrowing cost. Step 4: calculate the new monthly rate (including fees)APR CalculatorNext, determine what interest rate would produce the same $377.42 monthly payment on a $19,000 loan over 60 months. This effective rate is higher than the original 5.00% interest rate. After recalculating, the effective annual rate is approximately 7.13%. You can use the online calculator below.APR vs interest rate: table with differences
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