When you sign up for a loan — whether it’s a student loan, car loan, or home mortgage — you may see two different interest rates mentioned. One is the interest rate and the other is the annual percentage rate (APR).
If you’ve ever wondered why your loan has two different rates, and what those charges are, you’re not alone.
One important note: With credit cards, only one rate is shown: the APR. This is because for credit cards, interest rates are stated as a yearly rate, called APR. APR is a periodic rate, expressed as an annual amount, used to compute the interest charge on an outstanding balance.
What is an interest rate?
For credit products other than credit cards, your loan’s interest rate often is the first rate you’ll see advertised on a lender’s website. This is the interest rate you’ll pay each year to borrow the money, expressed as a percentage. It does not reflect fees or any other charges you may have to pay for the loan.
Note that an interest rate can be either variable (meaning the rate can change over time) or fixed (meaning the rate stays the same the entire term). Either way, your interest rate is always expressed as a percentage of your loan amount.
What is an APR?
For credit products other than credit cards, your loan’s APR is the full, detailed cost of your loan over the course of a year. This typically applies for non-credit card loans such as personal loans, car loans, or mortgages.
On a home loan, for instance, your APR might be higher than your monthly interest rate because the APR includes the cost of your loan origination fee (if you were charged one). On a car loan, your APR might be higher than your monthly interest rate because the fee includes things like sales taxes and prepaid finance charges that aren’t part of your car’s sales price.
How should you use these two numbers?
Be sure to look at both numbers when you’re comparing the same type of loan at two or more different lenders. Compare interest rate to interest rate and APR to APR. That’s your best way to get an accurate, apples-to-apples comparison.
And keep in mind that of the two rates, the APR is the more comprehensive one, since it’s a broader measure: It reflects the interest rate and other fees that you’ll end up paying.