What Is the Difference Between APR and Interest Rate?
What are Interest Rates and What Causes Them to Go Up and Down?
An interest rate is how much it costs the borrower to borrow a sum of money. For example, if you borrow $100,000 at 5% interest, it costs you $5,000 just to borrow the money. In this case, you would owe the lender $105,000 by the end of the loan.
The interest rate you receive is dependent upon a few different factors such as; your credit score, the amount of the loan, the length/terms of the loan, and the Fed Funds Rate. The Fed Funds Rate sets the base to interest rates because it is the rate banks are charged to borrow money. So, as a common borrower, you will always be charged a rate higher than the Fed Funds Rate (as the Fed Funds Rate increases, the higher your rate will be).
What is an Annual Percentage Rate (APR)?
Interest rates only include the cost of borrowing the money. The APR tells you the true cost of the loan as a whole because it includes all the costs the lender is charging you (broker fees, origination costs, etc.) plus interest. For example, if you borrow $100,000 and the interest rate is 5% and the APR is 7%, the lender is charging you 2% ($2,000) just in fees on an annual basis. So when you're discussing a loan with the lender, this rate is most important because it is how lenders can compete. Typically lenders charge very similar interest rates and do not have much wiggle room here, but they have a little more control over the APR. If you have good credit and a decent down payment, see if they have cheaper lending options.
Which is More Important APR or Interest Rate?
Neither is more important than another. It is important to pay attention to both. If interest rates are high, you know that the loan cost will be even higher and vice versa. If you know the current interest rates you can shop for a cheap lender by looking at APR rates. If interest rates are low and your APR is high, you know your lending is expensive and refinancing through someone else may be a good idea.
In my opinion, you should determine a good time to shop for loans by the current interest rates. Once your foot is in the door with lenders, begin shopping for the cheapest APR.
Which are you?
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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