Difference Between APR And Interest Rate : APR (or annual percentage rate) and interest rate are just two of the many costs that comes with a loan or mortgage.
Most people are often confused by these two separate costs.
Understanding the difference between APR and interest rate can help save you quite a great deal of money on your loan or mortgage. For starters, both costs are expressed as a percentage.
What is APR (Annual Percentage Rate)
The APR covers a wide range of the costs involved with your mortgage. It reflects the interest rate as well as the points, broker fees, and other charges.
This is why the Annual Percentage rates appears generally higher than the interest rate percentage.
The APR can be your best guide when comparing loans or mortgages. For instance, if you are shopping for a real estate mortgage, it would be wise to focus on the one with the lowest APR.
This is true especially if you are planning to have that real estate as a home for a long time.
In this case, choosing the lowest APR means paying the lowest amount possible for the property.
However, if you are not planning to stay for a long time, it would be better to go for the one with the higher rates.
There will be fewer upfront fees and it would mean that the property will cost less over the first few years.
What is Interest Rate
Meanwhile, the interest rate is the cost you incur for the principal amount borrowed. Depending on the agreement, it may be monthly or annual and variable or fixed.
It does not reflect other costs involved with the loan, as opposed to the APR. An interest rate reflects itself alone.
Difference Between APR And Interest Rate
There is also a significant difference between both when it comes to a consumer’s concern upon applying for a loan or a mortgage.
If you are a consumer who wants to get a loan with the lowest monthly payment, then you should concentrate on the interest rates available.
But if your concern is about the total cost of the loan, then you should look to the APRs of each loan options for comparison.
In sum, the main difference is that the former calculates the overall cost that you will incur for the loan while the latter calculates only the actual monthly or yearly cost.
If you are shopping for either a loan or a mortgage, you can use this difference as a guide to determine the loan that would best suit your current circumstance.