Guides & Learning
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.
Frequently Asked Questions
Why can a loan with a lower interest rate cost more?
Because the APR folds fees, insurance and other charges into the interest rate. A lower headline rate with high upfront costs can produce a higher APR — and a higher true cost — than a slightly higher rate with no fees.
Which charges are counted in the APR?
The APR typically includes the arrangement fee, valuation and legal costs and any compulsory insurance. Optional products paid separately are usually left out, so they sit outside the APR you see.
Which number should I compare between two loan offers?
Compare the APR. Because it reduces fees and rate to one annual figure, two loans with the same interest rate but different fees are only comparable through the APR.
Is the APR the same as the rate behind my monthly payment?
No. The monthly instalment is built from the nominal interest rate, while the APR also spreads the fees over the term. Use the APR to rank offers, not to calculate your payment.