APR vs. Interest Rate: Understanding the Difference can Save You Money

Interest rate is a general term in loans and lines of credit, and understanding how it works is a relatively simple task. APR is another prevalent term in financing, yet many people don’t understand its meaning, how it differs from the interest rate, and its impact on borrowing money. 

APR vs. Interest Rate

The nominal interest rate, or advertised rate, refers to the percentage you must pay for a specific period to borrow money from a lender. The interest rate is represented as a percentage, and it can be either fixed or variable. 

Interest Rate

Variable vs. Fixed Interest Rate

A fixed interest rate will never change, regardless of whether external factors that generally influence interest rates change, like financial markets. A variable interest rate, on the other hand, can vary during your loan lifetime. 


The Annual Percentage Rate, or APR, includes the interest rate of the loan and all other costs involved in it, such as fees, closing costs, discount points, etc. Same as the interest rate, the APR is also expressed as a percentage, and in the majority of cases, it should be the same or higher than the interest rate.

How Lenders Calculate the Interest Rate

Lenders calculate your interest rate using your data. Every lender has its formula to calculate the interest rate, and so you will most likely get five different rates from five lenders. 

How Lenders Calculate the APR

Things are a little different when it comes to APR, and unfortunately, you have less control over it, as your lender controls all of the fees that, along with your interest rate, make up your APR. However, one of the things you can do to lower your APR, at least when it comes to taking out a home loan, is to put at least a 20% downpayment. 

APR vs. Interest Rate  – Which One Should You Use?

So now you understand what the interest rate and APR are. But, which one should you go by when comparing loans? Unfortunately, the answer is, it depends. 

Swipe up now to read the full post!