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What is The Difference Between Personal Loan Interest Rate and APR?

To understand the cost of your loan, it helps to know the equation behind the rates.

Learn the difference between interest rate and APR for personal loans.

When you shop for personal loans, you'll be looking at a number of factors. The most important will always be personal loan interest rates. If you're going to borrow, it's important that you understand both how interest works as well as the benefits and drawbacks of looking at the APR or the personal interest loan rate for each lender. Doing so will help you to understand what you are borrowing and how much you will spend when you take out your loan.

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Interest and You

Businesses that lend money generally do so to make a profit. The way that this is done is by charging the borrower each month as the loan is paid off. This charge is called interest, and it's what causes you to have to pay back more money than you've originally borrowed.

The good news is that knowing about interest can help you figure out the real cost of borrowing. Learning how to calculate interest rate charges (interest rate divided the number of payments per year, multiplied by the balance of the loan) will allow you to figure out if borrowing is a wise move financially. Don't worry if you aren't much of a math person, though – a good personal loan rate calculator will do most of the work for you.

What Are Personal Loan Interest Rates?

When you see an interest rate posted on a loan, what you're seeing is the personal loan interest rate. Personal loan interest rates are generally thought of as the percentage that a loan originator is going to charge you over time when you take out your loan. Most lenders are fairly up-front with their interest rates in their advertisement, as this is the easiest way for the lender to show that there's a cost of doing business. Showing an interest rate also allows the lender to advertise the loan without having to disclose the full payment amount.

Given that seeking out personal loans with low-interest rate costs is usually the goal of every lender, this is a number that you're going to have to know in order to be successful. There are definitely some strong pros to looking at this type of number, as well as some equally strong drawbacks to only depending on this number.

The Pros

The personal loan interest rate is a good short-hand that allows borrowers to figure out if one loan is better than another. Indeed, it's the number that's going to be the best for most borrowers simply because it's so easy to compare and contrast between various lenders. If you're shopping for a loan, this quick and easy number will allow you to figure out the general cost of getting a loan from one source rather than getting it from another. It's ideal for quick comparisons.

Working off this number also gives you a fair idea of what it's like to do business with a lender. If you're looking at a number that's high above the personal loan interest rate, you're probably looking at a company that's going to have other expensive additions to your overall cost. Using this number as a general barometer can be a great idea.

The Cons

The bad news about using the personal loan interest rate by itself is that it doesn't give you the full amount of money that you're going to pay on a loan. It leaves out things like origination fees and maintenance costs, both of which can boost up the real cost of doing business by quite a lot. Given that personal loans are generally paid back over a long term, though, it's up to you to decide how important upfront fees are.

Looking only at this interest rate can also cause consumers to overlook other charges. You might go with one company because it offers a lower interest rate, not noticing that the addition of other charges might make it more expensive than the other loans. Personal loan rates are good to look at, but they won't reveal everything you need to know in order to make an informed decision.

What is the average interest rate on a personal loan?


The average personal loan interest rate varies quite a bit by credit score. If you have an excellent score, you may end up paying less for your loan. If you have a bad score, the interest rate can be much higher. These numbers always depend on the individual loan originator.

What is APR?

APR (annual percentage rate) is best thought of like the whole cost of doing business with a lender. It includes not only the interest that you'll be charged on the loan when you pay over time but all the other fees that might be included in the loan. This means you'll be looking at things as varied as the initial origination fees and monthly maintenance fees, as well as any fees you might incur for paying monthly versus paying all at once. APR tells you not only exactly what you're going to pay in terms of interest, but how much you're going to pay to get your loan.

The Pros

Looking at APR is a great idea. The best personal loans with low-interest rates are still those with a low APR, so looking at this number gives you a much better chance to determine exactly how much you are going to end up paying before you get your loan paid off. It also helps you to determine exactly how much money you would end up saving if you pay off the loan early or if you manage to pay a little extra every month.

This number is also useful because it helps you discover any hidden costs of doing business. Because the APR is usually a point or so higher than the interest rate, you'll be able to make a better comparison than just looking at interest rates alone. When you see the higher APR, you might be able to make a better decision based on where your money is going each month.

The Cons

There is a downside of using the APR as a method of loan comparison. Because so many loan companies are quicker to give out the personal loan rate, you'll have to do more digging to figure out the APR of each loan. You'll also be stuck with some useless information if your goal is to pay off your loan more quickly or if you are in a position that will allow you to get a loan without origination fees or other added costs.

You should also know that lenders don’t always include all the fees in the APR. Remember: smart borrowers do their homework to look for every possible hidden cost.

Before you look at your next loan eligibility calculator, make sure that you understand the concept of interest. Look at both the APR and loan interest rate to determine whether you're getting a good deal, and make sure that you use your knowledge to save yourself as much money as possible. A little extra math work at the beginning of the process can make personal loans much more affordable for the average borrower.