- Interest rate = the yearly cost of borrowing the principal.
- APR (annual percentage rate) = the interest rate plus required fees, expressed as a yearly rate.
- Compare loans by APR. A loan with a lower interest rate but a big fee can cost more.
Lenders often advertise two different percentages, and they’re easy to mix up. The difference matters because it can decide which loan is actually cheaper. Under the federal Truth in Lending Act, lenders must disclose the APR before you’re bound by a consumer loan, so you always have it available to compare.
Interest rate
The interest rate is what the lender charges for the use of the money itself. On a fixed-rate personal loan, it determines how much of each monthly payment goes to interest. It does not include upfront fees.
APR
APR folds certain required costs of credit, most commonly the origination fee, into a single yearly percentage. Because fees are usually deducted from the money you receive while you repay the full loan amount, they raise your effective cost of borrowing. APR reflects that.
APR is equal to the interest rate when there are no included fees, and higher when there are.
Example: the lower rate that costs more
You need $9,500 in hand and want to repay over 36 months. Two offers:
| Loan A | Loan B | |
|---|---|---|
| Interest rate | 12.00% | 13.50% |
| Origination fee | 5% ($500) | None |
| Amount borrowed | $10,000 | $9,500 |
| Cash you receive | $9,500 | $9,500 |
| Monthly payment | $332.14 | $322.38 |
| Total repaid | $11,957.15 | $11,605.87 |
| APR | about 15.61% | 13.50% |
Result: Loan A advertises the lower interest rate, but its APR is about two points higher, and it costs about $351 more over three years. APR pointed to the cheaper loan; the interest rate didn’t.
What APR does and doesn’t include
| Usually included in APR | Usually not included |
|---|---|
| Interest | Late payment fees |
| Origination or “administrative” fees required to get the loan | Returned payment fees |
| Certain other finance charges | Optional add-ons you choose to buy |
Because late and returned-payment fees aren’t in the APR, read the fee schedule too.
When APR comparisons can mislead
- Different terms: a 60-month loan may have a lower APR than a 36-month loan but cost more in total because you pay interest for longer. Compare total cost as well.
- Paying off early: APR assumes you keep the loan for the full term. If you’ll pay early, an upfront fee becomes a bigger share of your cost, which makes no-fee loans more attractive.
- Variable rates: for variable-rate credit, the APR can change over time.
APR vs APY
APR is for borrowing. APY (annual percentage yield) is for savings and includes compounding. A savings account advertises APY because it makes the number look higher; a loan uses APR.
How to use this when shopping
- Prequalify with several lenders for the same amount and term.
- Line up APR, monthly payment, total repaid, and cash received.
- If you need a specific amount in hand, make sure the fee won’t leave you short.
- Use our personal loan calculator with the fee field to see your true cost.
Next: learn how personal loans work or compare the best personal loans.
Frequently asked questions
Is APR higher than the interest rate?
APR is equal to or higher than the interest rate. It’s equal when there are no fees included in the APR calculation and higher when there are, such as an origination fee.
Which should I compare, APR or interest rate?
Compare APR when the loans have the same term. It captures both interest and required fees in one yearly percentage.
Is APR the same as APY?
No. APR is used for borrowing costs. APY (annual percentage yield) is used for savings and includes the effect of compounding on what you earn.