Annual Percentage Rate (APR) vs Interest Rate

Annual Percentage Rate vs Interest Rate, What's the Difference?

It’s not uncommon for some people to use the terms interest rate and annual percentage rate (APR) interchangeably. It’s important to understand that they are not the same. The APR is higher in most cases of annual percentage rate vs interest rate. Do you know why? Let’s explore the key differences between the annual percentage rate and the interest rate.

What is the Interest Rate?

The interest rate is the amount that a lender charges a borrower. Interest is shown as a percentage of the loan amount or principal. In other words, the interest rate is what is paid to the lender to borrow the money.

What is the Annual Percentage Rate?

The annual percentage rate is the yearly interest charged to the borrower from the lender including any fees or costs associated with the transaction. The APR includes interest, but it also includes additional fees such as origination fees. Simply put, APR is the amount you pay each year to borrow money including fees, displayed as a percentage.

Key Differences: Interest Rate vs APR

Your monthly payment is based on your interest rate, not APR - When estimating the dollar amount of interest paid each month, the interest rate is used.

Unlike the interest rate, APR is not a contractual percentage of a loan – APR is an overview of all charges associated with a loan, not a contractual agreement to pay.

The APR is almost always higher than the interest rate because it includes the interest rate – Don’t consider the interest rate and APR to be interchangeable; they are not.

Why Do We Use the Annual Percentage Rate?

The APR is meant to give you more information about what you are paying. The Federal Truth in Lending Act requires all consumer loan agreements to disclose the APR following the same set of rules to ensure accuracy. Therefore, the APR is more accurate as a consideration for comparing loans.

Understanding the difference between interest rate and annual percentage rate, or APR doesn’t have to be complicated.

Never compare interest rates with annual percentage rates. It’s like comparing apples to oranges, which won’t always match up. You could make an important decision based on inaccurate information. If you wish to purchase a new motorcycle or lower your monthly payment by exploring motorcycle refinance options, know the technical lingo, it could save you money.