In the realm of loans, the phrases annual percentage rate (APR) and interest rate are fairly prevalent. So, how can these two words be readily understood? Let’s read on to learn everything there is to know about annual percentage rates (APR) and interest rates. When you grasp the differences between the two, you may be able to save a significant amount of money.
What Does Annual Percentage Rate Mean?
The annual percentage rate, or APR, is the annual rate that a borrower will have to pay while borrowing money. This rate is presented as a percentage and represents the loan’s original yearly cost of funds throughout the life of the loan. In other words, you will be incurring the loan’s ‘cost.’
What Does Interest Rate Mean?
The amount of interest that has not been paid for a given period is referred to as the interest rate. The interest rate will be determined by the amount borrowed, the loan principal, the loan term, and the frequency with which the loan will be compounded. Because the borrower is utilising the lender’s funds, it is often a percentage of the loan principal amount charged by the lender.
Difference Between an Annual Percentage Rate and an Interest Rate
- If you only want to pay the smallest sum on a recurring basis for your personal loan, you should focus on the interest rate rather than the APR. This will assist you in determining a low monthly instalment amount and obtaining it. You can ensure that your personal loan’s monthly payments are manageable. By concentrating solely on the interest rate, you will be able to examine your loan’s expenses on a monthly basis rather than over the course of the loan’s whole term.
- If you want to determine the total cost of your personal loan throughout its whole term, however, you should focus on the annual percentage rate. When you know the APR of a particular loan, you can compare it to the APRs of other loans. You may make an informed decision based on this information, and you will be aware of all of your loan’s total expenses throughout the duration of the loan.
- It’s vital to remember that your monthly loan payment will be decided by your interest rate, not your annual percentage rate. As a result, you’ll be required to check each loan’s APR and actual interest rate before making a sound financial selection.
How do you decipher the annual percentage rate (APR) and interest rate on your loan?
Some lenders may present you with a loan estimate sheet when you apply for a personal loan. This will vary depending on the lender. You may get detailed information about your personal loan’s annual percentage rate (APR) and interest rate on the personal loan calculator at Finserv MARKETS.