APR vs. interest rate
When you compare loans you'll see two percentages that look alike: the interest rate and the APR (annual percentage rate). They measure different things, and mixing them up can make an expensive loan look cheap.
Interest rate
The interest rate is the yearly cost of borrowing the money itself, not counting fees. It's what determines how much of each payment goes to interest.
APR
APR rolls the interest rate and most upfront fees, such as an origination fee, into one yearly rate. Federal law (the Truth in Lending Act) requires lenders to disclose the APR so borrowers can compare offers on equal terms.
An example
Two offers for $10,000 over 3 years:
- Offer A: 11% interest rate, no origination fee. APR is about 11%.
- Offer B: 10% interest rate, 5% origination fee ($500). Because you pay $500 up front, the APR works out to roughly 13.6%.
Offer B has the lower interest rate, but Offer A is the cheaper loan. That's why APR is the number to compare.
Quick rules
- Compare offers by APR first, then by monthly payment and total cost.
- If two APRs are close, check for a prepayment penalty and late fees.
- A lower monthly payment from a longer term can still mean more total interest.
This guide is general education, not financial advice. Example figures are illustrative.