What is the Difference Between APR and Interest Rate?

You’ve seen them posted on billboards and ads, but what is the difference between APR and interest rate? Are they interchangeable? 

What do they mean? These two terms may seem confusing, but they don’t need to be. Let’s take a look at what APR and interest rates are, and how they impact you.

What is APR?

There is always potential for a bit of confusion when throwing around acronyms, so let’s cover the basics. APR stands for “Annual Percentage Rate,” and it simply refers to the rate you are charged per year while carrying a balance. Think of it as how much the loan costs you each year as the borrower. This percentage is set by the lender, and as such can vary depending on the costs and fees of each lender.

Interest Rate

An interest rate may seem more straightforward, since it is simply expressed as a percentage, showing the rate of interest. This rate can be fixed or variable, and it does not reflect any fees or other charges. The percentage is determined by the borrower’s credit score and prevailing rates.

What’s the Difference Between APR and Interest Rate?

The difference between the two terms can be very subtle, especially given how similar they are. While both rates are expressed as percentages, they hold different information. The key difference is that the APR includes any additional charges or fees in the total cost of the loan to the borrower. Common examples of these might be closing costs, mortgage insurance, or loan origination fees. Due to these extra costs, your APR is typically a higher percentage than your interest rate. This additional information is helpful to the borrower in understanding the truth about what they’ll actually be paying.

TILA

The Federal Truth in Lending Act (TILA), enacted in May of 1968, was created to provide protection to loan borrowers. TILA requires lenders to disclose the APR in each consumer loan agreement. Since all lenders must follow the same rules for disclosure, this makes the APR a good baseline for comparing costs of different loans. 

Compare Like with Like

The benefit of having this information clearly laid out for you is to be able to make smart, informed choices when looking at loan options. The APR helps you to more accurately compare actual costs. Be careful to compare like with like, however, as there can be subtle differences between different types of loans. For example, use caution when comparing fixed-rate loan APRs with adjustable-rate loan APRs. The APR of a closed-end loan includes fees, while a home equity line of credit APR does not include fees. The Consumer Financial Protection Bureau has a helpful guide to assist you in navigating these various nuances. 

Keep It Simple with Sell Your OKC Home

Understanding the difference between APR and interest rate can be a little confusing. There are a lot of factors to take into account when comparing rates and choosing a lender. One simple solution is to work with Sell Your OKC Home. We offer cash for your home, and we make the process of selling as straightforward and easy as possible. Whether you’re looking to sell your home in Moore or Mustang, Norman or Nichols Hills, we can offer you a fair cash offer in as little as 48 hours. Give us a call at 405-578-7913 or contact us online today!

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