What is the Difference Between APR (Annual Percentage Rate) and Interest Rate?

The main difference between APR (Annual Percentage Rate) and interest rate lies in the costs they cover. Here is a breakdown of the differences:

Interest Rate: This is the cost of borrowing the principal amount of the loan, expressed as a percentage rate. It does not include fees or any other charges associated with the loan.
APR (Annual Percentage Rate): This is a broader measure of the cost of borrowing money, reflecting the interest rate, any points, fees, and other charges associated with the loan. APR includes the interest rate and other fees connected with your loan, making it a more accurate representation of the total cost of borrowing.

In summary:

Interest rate is the cost of borrowing the principal amount of the loan.
APR includes the interest rate and additional fees or charges associated with the loan.

It is essential to compare APRs rather than interest rates when evaluating different loans, as APR provides a more comprehensive understanding of the total cost of borrowing. This comparison allows borrowers to make informed decisions and potentially save money over the life of the loan.

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What is the Difference Between APR (Annual Percentage Rate) and Interest Rate?

Comparative Table: APR (Annual Percentage Rate) vs Interest Rate

The difference between APR (Annual Percentage Rate) and interest rate can be understood through the following table:

Feature	Interest Rate	APR (Annual Percentage Rate)
Definition	The interest rate is the cost of borrowing principal and is stated at the time of loan closing.	The APR includes the interest rate and additional fees or expenses associated with the loan, such as brokerage fees, private mortgage insurance, and discount points.
Mathematical Representation	Interest rate is calculated as the ratio of the amount of interest paid to the principal borrowed.	APR takes into account the interest rate and any additional costs or fees, making it a more comprehensive measure of the cost of borrowing money.
Comparison with Fees	The interest rate does not include any additional fees or expenses.	The APR includes various fees and expenses associated with the loan, making it a more accurate representation of the total cost of borrowing.
Importance for Borrowers	Understanding the interest rate helps borrowers know the basic cost of borrowing money.	Comparing APRs across different loan offers can help borrowers find the best rate and understand the true cost of financing.

In summary, the interest rate represents the basic cost of borrowing money, while the APR includes both the interest rate and additional fees or expenses associated with the loan. Comparing APRs is a more accurate way to understand the total cost of borrowing, as it takes into account all the fees and expenses associated with a loan.

Guilherme Mazui

Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.