How is APR different from interest rate?

APR and interest rate are both used to describe the cost of borrowing money, but there is an important difference between the two.

The interest rate is the cost of borrowing the principal amount of a loan, expressed as a percentage of the amount borrowed. For example, if you borrow $10,000 at an interest rate of 5%, you would owe $500 in interest for the year.

The APR, on the other hand, includes not only the interest rate but also any other fees associated with the loan, such as origination fees, points, and other charges. This means that the APR is typically higher than the interest rate, as it includes all of the costs of borrowing money.

The APR is used to provide a more accurate picture of the total cost of borrowing money over a year, and can be helpful when comparing loans from different lenders. However, it’s important to remember that the APR does not take into account any fees that may be charged later in the loan, such as late payment fees or prepayment penalties. When comparing loan offers, it’s important to carefully review the terms and conditions to understand all the fees and charges associated with the loan.