APR vs Interest Rate
APR vs Interest Rate: What Borrowers Need to Know
The interest rate and APR (Annual Percentage Rate) are different numbers that both matter when comparing loans.
The interest rate and APR (Annual Percentage Rate) are different numbers that both matter when comparing loans.
What This Page Covers
The nominal interest rate is the basic cost of borrowing. APR (Annual Percentage Rate) includes the interest rate plus all fees and additional costs, giving you the true annual cost of the loan.
How It Applies
Loan A: $10,000 at 5% interest with $200 in fees = APR ~5.8%. Loan B: $10,000 at 5.5% interest with $0 fees = APR 5.5%. Despite higher interest, Loan B is actually cheaper because of no fees.
Details
Always compare APRs, not just interest rates, when shopping for loans. A lower interest rate with high fees can cost more than a higher rate with no fees.
Context
In the US, lenders are legally required to disclose APR. In the EU, the equivalent is TAEG/TAE (Annual Effective Global Rate). In the UK, APR is used. In Canada, APR disclosure is mandatory for all consumer loans.