APR vs Interest Rate: What’s the Difference?

TL;DR

• Interest rate is the cost of borrowing the principal.
• APR includes interest rate plus certain fees and gives a more complete cost.
• APR is usually higher than the interest rate and is better for comparing loans.

Key idea

When comparing loans, you will usually see two numbers:

• Interest rate
• APR (Annual Percentage Rate)

These numbers are related, but they are not the same.

The interest rate shows the cost of borrowing the principal amount.

The APR includes both interest and certain loan fees, expressed as a yearly percentage.

Because APR includes additional costs, it is often higher than the interest rate.

This makes APR a better tool for comparing loan offers.

What is an interest rate?

The interest rate is the percentage charged on the loan balance.

It determines how much interest you pay over time.

Example:

• Loan: $10,000
• Interest rate: 6%

First year interest is approximately:

$10,000 × 6% = $600

As the balance decreases, interest decreases.

The interest rate does not include most loan fees.

What is APR?

APR stands for Annual Percentage Rate.

APR includes:

• Interest rate
• Certain lender fees
• Loan origination fees (in many cases)
• Some closing costs (depending on loan type)

APR represents the total borrowing cost as a percentage.

This makes it easier to compare different loans.

Example: Interest rate vs APR

Loan A:

• Interest rate: 6%
• Fees: $0
• APR: 6%

Loan B:

• Interest rate: 5.5%
• Fees: $1,000
• APR: 6.3%

Even though Loan B has a lower interest rate, its APR is higher.

This means Loan B may cost more overall.

Why APR is usually higher

APR includes additional costs beyond interest.

These costs are spread across the loan term.

This increases the effective yearly percentage.

The larger the fees, the bigger the difference between APR and interest rate.

When interest rate still matters

Interest rate directly affects:

• Monthly payment
• Interest portion of each payment
• Early loan repayment cost

APR is best for total cost comparison, but interest rate helps understand payment structure.

Both numbers are useful.

Common mistakes

• Looking only at interest rate
• Ignoring loan fees
• Assuming lowest rate means lowest cost
• Not comparing total loan cost
• Comparing loans with different terms incorrectly

Practical tips

• Always compare APR when choosing between loans
• Check both APR and monthly payment
• Ask lenders what fees are included
• Compare total repayment amount
• Use calculators to estimate real costs

FAQ

Is APR always higher than interest rate?

Usually yes, but not always. If there are no fees, APR and interest rate may be the same.

Which is more important, APR or interest rate?

APR is better for comparing total loan cost. Interest rate is useful for understanding payment details.

Does APR affect monthly payment?

Indirectly, yes. Higher APR usually means higher total cost.

Why do lenders show both numbers?

Because they measure different aspects of loan cost.

Related calculator

Use the APR Calculator to estimate APR and compare borrowing costs more accurately.

You can also try the Loan Calculator to see how interest rate affects monthly payments.

Disclaimer

This guide is for educational purposes only. APR calculations vary depending on lender methods, loan structure, and fees. Always review official loan disclosures before making financial decisions.