Borrowing money safely and efficiently requires research. Whether you’re looking for a new credit card or applying for a loan, there are things you watch for to ensure it’s a safe bet.
One of those factors is the cost of borrowing money. Generally, lenders specify this cost through interest rates and APR.
But, although these two factors represent this cost, they also differ in significant ways. So, it’s beneficial for borrowers to understand the difference between interest rates vs. APR.
Fortunately, we’ll explore that difference in the guide below! Read on to learn everything you need about these distinctions.
Interest Rates: What Are They?
As mentioned before, interest rates represent the cost of borrowing money from lenders. It’s always expressed as a percentage charged on your principal loan amount.
Most types of loans have a clear-cut principal loan amount. But, some may vary with time. For example, your credit card’s principal loan amount is your outstanding card balance.
What is APR?
APR stands for annual percentage rate. It’s similar to your interest rate in that it measures the cost of borrowing money. Lenders also express this figure as a percentage.
However, your annual percentage rate includes other prices beyond the interest rate. These prices include lender fees, insurance premiums, and closing costs.
In some cases, your interest rate and APR may be the same. Credit cards often have identical interest rates and APR.
But, other types of loans have differing percentages for these. For example, a mortgage loan has a higher APR than interest rates. The mortgage APR includes your:
- Interest rate
- Broker fees
- Additional loan charges
So, how are these two percentages determined? We’ll explore that question in the next section.
Determining Interest Rates vs. APR
Different types of loans determine your interest rates and APRs based on differing factors. For example, credit cards often issue interest rates and APRs based on your application information and credit history.
Let’s say you make a high salary and have excellent credit. In these cases, a credit card provider may offer lower APRs. But, lenders often charge more to borrowers with low salaries and bad credit.
Other loans consider these factors as well. But, these lenders generally consider some additional factors, too. One critical consideration is the size of your down payment.
Usually, higher down payments result in lower APRs and interest rates. Lenders often use a formula that determines your interest rate.
Your down payment serves as a variable in that formula. You can calculate your likely interest rate with Title Loanser.
Find Manageable Interest Rates and APR
As you can see, there are some critical differences between interest rates vs. APR. Usually, your APR is a higher percentage than your interest rate.
Knowing these differences can help you find the best loans for your needs. So, browse through some offers to find the best borrowing deal available!
We hope you enjoyed this article! If so, we have several other financial tips and breakdowns for you. Check out our other content to find more helpful information today.