The two things, APR and interest rate, you have probably seen when applying to get a loan or credit card. They are different in spite of appearing the same. With an understanding of the distinction, you can be able to make more wise financial decisions and prevent the need to incur more cost than the anticipated amount. Let us make it simple.
Prior to taking any loan, it is worth learning the meaning of the two terminologies and how they impact the cost of your loan.
The interest rate is the simple percentage you pay to the lender on the amount you take. It is just the cost of a loan, without including fees and additional expenses.
Suppose that you borrow 1 lakh rupees at a rate of 10 percent per annum, then you will end up paying 10,000 rupees yearly just to get your money back.
APR (Annual Percentage Rate) adds up not only the interest rate but also other kinds of charges such as loan origination fees, processing charges, or insurance. It estimates your annual loan amount in percentage form.
Where the loan involves fees that are to be charged on the loan and the interest rate is 10 percent, the APR may be approximately 11 percent or higher, based on the number of charges.
Many people focus only on the interest rate and ignore the APR, but doing so can lead to costly mistakes.
Using APR vs interest rate for loan cost comparison helps you see the real picture. While the interest rate shows only the borrowing cost, APR shows what you’ll pay yearly.
Example:
Loan A: Interest rate – 9%, APR – 9.5%
Loan B: Interest rate – 8.5%, APR – 10%
Though Loan B has a lower interest rate, the total cost (APR) is higher due to more fees.
Some loans look cheaper due to lower interest rates, but the hidden fees increase the actual cost. APR reveals these hidden charges, allowing you to choose the most affordable loan.
APR may sound confusing, but understanding how it’s calculated can help you see the full cost of your loan or credit.
Let’s say you borrow ?5,00,000 at a 9% annual interest rate.
Interest for 1 year = ?5,00,000 × 9% = ?45,000
Suppose the loan includes an origination fee of ?5,000. Total loan cost becomes ?45,000 + ?5,000 = ?50,000
To find APR, this total cost is converted into a yearly percentage based on how long you’ll take to repay the loan. There are online calculators or formulas for exact math, but in this case, the APR will be slightly higher than 9%, likely around 10%.
So, the APR calculation explained shows that fees increase the real cost of your loan beyond the stated interest rate.
If you’re taking a home loan, comparing the mortgage APR vs rate is crucial. This will help you understand the full cost of borrowing.
This is the simple rate the bank charges you for the loan amount. For example, if your home loan is ?50,00,000 at 7% interest, your interest for the first year is ?3,50,000.
APR includes not just interest but also:
So, your 7% interest mortgage may have an APR of 7.8% or more. This means your loan will cost more annually.
Banks might advertise low interest rates, but if the APR is higher, you’ll pay more in total. Always compare the APR vs interest rate when comparing mortgage deals.
Credit cards often come with attractive offers like 0% interest for the first 3 months, but the APR tells you the full story.
Most credit cards have multiple APRs:
Even if the card says 0% interest, it could later charge 20% or more after the offer ends.
Using these credit card APR tips, you can avoid paying high interest rates.
The difference between APR vs interest rate becomes more important depending on how long you plan to repay the loan.
Even if the APR is high, the total cost might be low due to the shorter time. For example, a 12-month personal loan with a 15% APR might cost less in total than a long-term loan with a lower interest rate.
With long-term loans like car loans or mortgages, small differences in APR make a big impact. The lower APR can save you thousands over time.
Choosing the right loan depends on more than just the lowest interest rate.
APR gives you a complete loan cost comparison.
In such cases, the interest rate can be more useful than APR.
To get the best deal, always focus on the total cost of borrowing, not just the interest rate.
Both APR and interest rate are different tools that influence your loan life. Interest rate will tell you how much it will cost you to take credit, whereas APR is going to tell you everything and will provide you with the actual picture. When it comes to comparing APR vs interest rate, the idea applies to every aspect of financial decision-making. For example, in case you take a mortgage or apply for a credit card or want to obtain a personal loan, comparing APR vs interest rate will assist you in financial decision-making. The knowledge of the difference will assist you in terms of not signing bad loan deals, saving more money, and acquiring the least total cost of a loan in the long term.
This content was created by AI