For those who don’t work in the financial industry, loans can be a rather confusing topic. There are all kinds of financial terms and lingo that get thrown out there, and unless you are familiar with them it can all be a bit confusing. Not learning what each of the terms means can, unfortunately, lead to thousands of dollars’ worth of fees, charges, and interest that only increase the cost of borrowing. In fact, if you don’t understand the full cost of borrowing it can become so expensive that the loan itself ends up being a poor financial decision in the end.
One set of terms that are often lumped together, interchanged, and generally confused is APR and interest rates. All too often, people assume they are one and the same, which isn’t true at all. Here we’ll take a look at APR vs interest rate dispelling any confusion.
APR vs Interest – Are they Different?
When investigating APR vs interest, the first thing that may come as a surprise is to learn they are two totally different things. Both are reflected as a percentage, so it’s easy to see one and assume they are both the same and are interchangeable.
Both APR and the interest rate are meant to make it clear what the true cost of borrowing money is. Let’s say, for example,the loan is for $10,000, well that isn’t the true cost as you need to factor in the APR and interest.
So, what’s the big deal? Well, the differences between the APR and interest rate can be so large that the true cost of borrowing increases by thousands of dollars. That’s a rather substantial amount of money.
APR 101 – Breaking Down the Basics
APR stands for annual percentage rate. It is a blend of any fees that are owed on top of the loan, as well as the interest rate itself.Some of these fees can be origination fees, discount points, and broker fees. You’d be surprised as just how fast all these additional fees can add up and really impact the total cost of borrowing.
In a nutshell, the APR is the additional fees and the annual cost of your loan reflected in a combined percentage.
Interest Rate 101 – Breaking Down the Basics
The interest rate tends to be the figure more people are familiar with and usually pay closer attention to. The interest rate, just like the APR, is also reflected as a percentage.This percentage reflects the amount of money that will need to be paid back on top of the amount borrowed. Clearly, the lower the interest rate, the better is it since that means the true cost of borrowing is lower.
Stay Informed and Make the Right Decision
By brushing up on your knowledge of APR vs interest rates, you will be able to make an informed decision when it comes to getting a loan, as the total cost of borrowing will be clear.