APR vs. Interest Rate: Understanding the Difference Can Save You Money

What about APR? APR is another prevalent term in financing, yet many people don’t understand its meaning, how it differs from the interest rate and its impact on borrowing money.

Interest Rate The interest rate is represented as a percentage, and it can be either fixed or variable. While the interest rate can be set for any period, it is usually expressed as an annual rate.

A fixed interest rate will never change, regardless of whether external factors that generally influence interest rates change, like financial markets.

A variable interest rate, on the other hand, can vary during your loan lifetime. That is because variable interest rates are tied to an index rate, and if such index rate changes, so does your interest rate.

How Lenders Calculate the Interest Rate Lenders calculate your interest rate using your data. Every lender has its formula to calculate the interest rate, and so you will most likely get five different rates from five lenders.

While you don’t have much control over the actual interest rate given to you, there are things you can do to increase your creditworthiness and, thus, improve the interest rate lenders provide you.

How Lenders Calculate the APR Things are a little different when it comes to APR, and unfortunately, you have less control over it, as your lender controls all of the fees that, along with your interest rate, make up your APR.

So now you understand what the interest rate and APR are. But, which one should you go by when comparing loans? Unfortunately, the answer is, it depends.

For this reason, it is always important to consider both the interest rate and APR of the loan. As part of this equation, knowing or estimating whether you will repay the loan sooner or not makes a difference.

Knowing the interest rate and APR of a loan is essential when comparing multiple loans or simply deciding if taking a loan at all is the right choice.

Swipe Up To Read More about  APR vs. Interest Rate: Understanding the Difference Can Save You Money