Written by: Josh McFadden | Best Company Editorial Team
Last Updated: September 11th, 2019
When it comes to obtaining a personal loan-or any other type of loan-there are certain terms and definitions you'll hear. Each of these plays on important role for the lender and for you as you qualify for, receive and repay the loan.
Sometimes getting a loan may seem like a complicated process, and understanding the nuances and specifics of a loan may feel challenging. But you don't need an advanced degree in finance or economics to understand the basic principles that govern these issues.
Two basic and common terms you'll hear when applying for and being granted loans are interest rate and APR. Perhaps these are synonymous to you, but there are subtle and important differences. It's helpful for you, the recipient of a personal loan (or another type), to understand what's similar and what's different about interest rates and APR.
The interest rate is expressed in percentage form in annual terms. It is is the amount a lender charges in addition to the principal that the borrower pays with the loan. Interest rates can vary considerably even within loan types, but they are lower for those consumers who have a better credit score. They are also different depending on the loan type. For example, interest rates on unsecured loans such as credit cards and personal loans are much higher than interest rates on secured loans such as automobile loans and mortgage loans.
APR stands for or annual percentage rate It is a rate the lender charges on a loan (expressed by a percentage) for the cost of funds over the course of a year. The APR comprises fees and additional costs. Like the interest rate, the APR can vary based on the borrower's credit, loan type and market conditions. Simply put, APR is the interest rate PLUS lender fees and other costs the lender or institution assesses.
If you want to know exactly how much you're going to pay for your loan over its life, you probably know not to look at the principal. If you receive a personal loan for $10,000, for example, you'll actually end up paying more than the $10,000. This is because of the interest rate and other fees. Unless you pay off the loan well before the end of the term, you could end up paying quite a bit more than the original $10,000.
The most accurate and prudent way to determine just how much you can expect to pay over the loan period is not to look at interest rate only but instead to factor in APR. Remember, APR includes the interest rate, in addition to any other costs and fees the lender requires.
Depending on your lender and loan type, you may not be responsible for a great deal of extra costs and fees. In a case such as this, the interest rate and APR would be very close to one another.