APR vs Interest Rate: What’s the Real Cost of Your Loan?
Key Takeaways:
• Interest Rate is just what you pay the lender to borrow the money.
• APR includes extra costs like points, fees, and closing costs.
• APR is great for comparing loan offers—especially short term.
• If you're staying long-term, a lower rate might save more.
What’s the Difference Between APR and Interest Rate?
Your Interest Rate is the percentage you pay yearly to borrow money—simple as that. But it doesn’t tell the full story. APR, or Annual Percentage Rate, gives you the full picture. It includes the interest rate plus extra costs like lender fees and discount points.
What Does APR Include?
APR includes:
- Interest Rate
- Loan origination fees
- Discount points
- Mortgage broker fees (if any)
- Some closing costs
It’s a more complete view of how much the loan actually costs you.
Side-by-Side Comparison
| Interest Rate | APR (Annual Percentage Rate) |
|---|---|
| Only the cost to borrow money | Includes rate + fees + points + some closing costs |
| Lower number | Usually a bit higher than rate |
| Used to calculate monthly payment | Used to compare loan offers |
| Best for long-term savings | Best for comparing short-term or upfront costs |
When a Lower APR Matters
If you plan to sell or refinance in a few years, a lower APR often means fewer upfront costs. This can save you money if you’re not holding onto the mortgage for long.
When a Lower Interest Rate Matters
If you plan to stay in your home long-term, a lower rate—even with a slightly higher APR—might save you more over the life of the loan. Less interest paid over time = bigger savings.
Common Questions
Is APR always higher than the rate?
Yes, usually—because it includes extra costs. But if a lender offers credits, the APR could be close to or even equal to the rate.
Why are lenders allowed to advertise just the rate?
Because it's lower and sounds better. But lenders are required by law to also disclose the APR. Always ask for both.
Can two loans have the same rate but different APRs?
Absolutely. That’s why the APR is key to comparing offers. A lower APR means lower total costs over time.
What should I look at first—rate or APR?
Look at the interest rate to see your monthly payment. Look at the APR to understand the total cost. Both matter!
Bottom Line
The interest rate tells you what you’ll pay each month. The APR tells you what you’ll really pay overall. Smart borrowers check both before signing anything.
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