Interest Rate Versus APR
A common question we get asked is, “What is the difference between an interest rate and APR (Annual Percentage Rate)?”. Although the answer is simple it is best to explain in detail. Unfortunately you’ll see advertisements that focus on interest rates sometimes rather than focused on APR. Here’s a breakdown so that you can understand more completely the differences.
The interest rate given is expressed as a percentage in terms of the rate without any additional fees or points. So simple 6% interest on a loan for $100,000 would be $6,000.
Annual Percentage Rate
This is expressed in terms of your interest rate that you pay annually. This is the amount you pay including interest, lender fees, an origination fee, points and other various fees. Lenders will oftentimes advertise low APR rates that require you to pay mortgage points to get the low rate. It is important to note that adjustable-rate mortgages don’t reflect the most accurate APR since it doesn’t include the higher rate paid after the initial low rate period is over.
You’ll want to focus on APR instead of interest rate because over the long run you’ll end up paying much more with a loan that has a higher APR. Just remember that APR is the true cost of the loan. The interest rate is the amount of interest you’ll pay over the life of the loan. It is important when shopping for a loan that you are comparing the APRs to get the best idea of what you are getting from lenders.