APR vs. Interest Rate: What's the Difference?

Of the several commonly used terms in the world of lending, two of them, annual percentage rate (APR) and interest rate, are often used together. However, what's the difference between these two terms?

So what is the difference between interest rate and APR? The difference between interest rate and APR can be situational and significant. In some cases, your interest rate and APR could be the same. In other cases, they’ll be different, and the differences depend on factors relating to your own loan, the kind of loan you’re after or what your lender charges borrowers.

At a glance: APR vs. interest rate

You may hear lenders use APR and interest rate interchangeably. Sometimes it’s fine to do this, but as a savvy borrower, you'll need to keep in mind that the terms are not always the same and do not always amount to the same financial totals. Knowing the difference between the two loan terms will be essential as you explore the pros and cons of a specific loan or the array of loan types available to you.

An interest rate is a percentage charged to you as part of a loan (or what a bank pays you for keeping a deposit account, conversely). On the other hand, APR paints a truer picture of what you have to pay your lender in addition to the remaining balance on your loan. APR, unlike interest rate, can include fees and premiums your borrower charges in addition to the interest rate on your loan. 

APR definition

APR is essentially the cost of borrowing money. APR often includes interest, as well as a variety of fees, that often comes with loans varying by the lender, as well as the structure of the loan itself. Credit cards, however, may not include additional fees. In this case, APR is synonymous with your interest rate. If you’re asking yourself “is APR the same as interest rate?” know that the answer depends on a few factors.

Several common fees can be rolled into a loan’s APR calculation. These include, but are not limited to:

• Loan origination fees

• Mortgage insurance

• Broker fees

• Closing costs

Not all fees associated with a loan are necessarily rolled into an APR, however. This depends on your lender, as well as the specific terms included within your loan. So bear in mind you may still have to pay more than what your APR specifies at any given time. An APR is meant to be a straightforward glimpse into how much you can expect to pay as part of your loan.

Interest rate definition

Now that we’ve laid out what an APR is and how it works, you might be wondering: why is APR higher than the interest rate? The simple answer is that your interest rate consists of the interest payments you make on top of the principal of the loan that you’re repaying. In other words, your interest rate is a percentage of the loan’s total cost you’re expected to repay on top of the balance of the loan itself.

Interest is a financing fee usually presented as a percentage of the full balance of a loan, credit card, line of credit or other common loan types.

The interest rate on your loan amount may vary depending on several factors, including benchmark rates across certain lending products or your personal credit score. Although most of the deciding factors affecting your loan’s interest rate are due to external factors, some personal details about your finances hold sway on the rate you pay. 

• Fixed-rate loans come with interest rates that remain the same despite changes to current rates being offered; that is, you'll pay the same amount of interest whether rates go up or down.
• Adjustable-rate loans come with interest rates that fluctuate with overall market trends: If interest rates on new loans drop, your adjustable-rate loan may as well. The same is true for interest rate increases, however, which may mean you could pay more in interest. 

It's worth asking your lender to confirm your APR and interest rate are the same or whether they differ because of these factors; some lenders use the terms interchangeably, which can lead to confusion. APR and interest rate information can be found within your loan documents, since the Truth in Lending Act (TILA) requires lenders to disclose the total fees and interest you’ll pay on your loan. 

APRs and interest rates as comparison tools

Grasping the differences between APR and interest rates can help you evaluate your lending options. These totals may vary between different lenders or between different kinds of loans themselves. Knowing your total APR for a loan helps you identify any fees you have to pay as part of your borrowing in addition to the rate you’re charged on the loan itself. This can help you understand the financial ramifications of your loan beyond a simple interest rate calculation.

Another core consideration here is that two loans can have the same APR, but come with different interest rates. This may affect your monthly payments and should be a key consideration, especially if you’re looking to contrast low monthly payments with a lower overall loan cost over the long term.

When you’re looking for the right loan, consider more than APR and interest rates. Partnering with the right lender is crucial as well. Your bank should offer you tools, insights and transparency about what they offer throughout the loan process. That’s why First Republic’s Personal Lending services are an excellent option to consider: Our team of seasoned banking professionals can help you pick the right option for your finances, be it for short- or long-term loans or other credit products.