What is the Difference Between Rate and APR?
🆚 Go to Comparative Table 🆚The main difference between a rate and an APR lies in what they cover. An interest rate is the percentage of a loan that you'll pay as a fee for borrowing money, while an annual percentage rate (APR) measures all the costs of a loan, including interest and origination fees. In other words, interest rate measures just one factor, whereas APR measures several.
- Interest Rate: This is the cost you pay each year to borrow money, expressed as a percentage. It does not include fees charged for the loan.
- Annual Percentage Rate (APR): This is the cost you pay each year to borrow money, including fees, expressed as a percentage. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Since the APR includes your interest rate and other fees associated with the loan, it is generally considered a more accurate representation of the true cost of borrowing money. When comparing loan options, it is recommended to compare the APRs rather than just the interest rates, as this will give you a better understanding of the total cost of the loan.
Comparative Table: Rate vs APR
The difference between interest rate and APR (Annual Percentage Rate) lies in the costs they represent when borrowing money. Here is a table summarizing the key differences:
| Interest Rate | APR (Annual Percentage Rate) |
|---|---|
| Interest rate is the cost of borrowing the principal amount of a loan. | APR includes the interest rate and additional fees or expenses related to the loan, such as origination fees, broker fees, and closing costs. |
| It is typically the initial rate quoted by lenders and may be fixed or variable. | APR provides a more accurate picture of the total borrowing cost, as it takes into account all fees and expenses associated with the loan. |
| The interest rate may not include additional fees and expenses. | The APR is usually higher than the interest rate due to the inclusion of additional fees and expenses. |
When comparing loans, it is essential to consider both the interest rate and the APR. The interest rate determines the cost of borrowing money, while the APR represents the total cost of financing, including any additional fees or expenses. Paying attention to the APR can help borrowers make more informed decisions when choosing a loan provider.
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