What's the Difference Between Interest Rates and APR?

What’s the Difference Between Interest Rates and APR?

Excalibur Homes
Excalibur Homes

What's the Difference Between Interest Rates and APR?

When shopping for a loan, one of the most important things to consider is the interest rate. This is because it helps you buy and budget accordingly. Of course, it’s understandable that you’d want to look for a loan with the lowest interest rate possible, and when you find one, it can feel like winning the lottery. However, if the interest rate seems too good to be true, the loan provider may not be giving you all the information. It’s likely that they’re not including the Annual Percentage rate (APR). If you want to make sure you’re getting a loan that truly fits within your budget, you should look at what APR is and how it differs from interest rates.

What Is an Interest Rate?

Loans almost always have interest rates expressed in percentages. In financial terms, interest is the fee someone pays to borrow money from a lender. The interest rate is the amount of interest due per pay period in proportion to the amount of money borrowed. As mentioned, it stands to reason that a borrower would want to find a lender that advertises the lowest interest rate possible. The higher the interest rate, the more you have to pay at the end of the day.

What Is APR?

APR is the rate at which the loan will accrue interest over the course of a year. Typically, APR will include the base interest, closing costs, origination fees, document preparation fees, and underwriting fees. When a lender doesn’t include the APR in the advertising, the interest rate will appear much lower compared to other competitors. Ultimately, the difference between interest rates and APR is that an interest rate doesn’t include all the fees you have to pay.

Why Is Knowing Your Loan’s APR Important?

If you don’t know your loan’s APR, you’re simply not getting the best picture of how much you’ll pay to take out a loan. While it may not seem like much, a loan’s APR can quickly put you over budget if you’re not careful. This is especially true when considering that the origination fee—the fee charged for processing a loan—can vary. Ultimately, before you agree to a loan, you should make sure you know exactly what’s in your APR.

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