APR vs interest rate: what's the difference?

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Northpointe Bank, Bank

@NorthpointeBank • 07/19/16 This answer was first published on 07/19/16. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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Interest rate is the figure used to calculate the interest amount you pay on a loan. For example, a 5.00% rate on a $10,000 loan on a 48-month term equates to monthly payments of $230.29. In this case, the interest rate and APR both equal 5.00%.

Compare that to a loan with a interest rate of 4.50% but there are also fees due at closing (say, a documentation preparate fee among others) that add up to $200. Clearly the 4.50% rate is better than 5.00%...but do you still come out ahead considering the extra $200 in fees? That's where APR comes into play - it allows you to compare offers by disclosing to you the 'true cost of credit' which includes both your interest rate plus any associated fees. This is one of the reasons regulators require lenders to disclose the APR (or APY on deposit accounts) to consumers on their websites or within an advertisement.

Back to our examples -- in the second example, the APR equals 5.25% so Option #1 is clearly the better offer!

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