Interest Rate Vs APR – What is Difference?

Personalized offers have made it much easier to qualify for unsecured loans like the personal loan. You can now access these offers online or through an app, and the entire process is digital. As such, you may be tempted to avail such offers, but you should not do so without calculating the annual percentage rate.

Also known as the APR, the annual percentage rate is unlike the other charges or rates applicable on the loan. In fact, some lenders may not even mention the APR when offering the loan. However, it is an important rate to know, and it differs from the interest rate offered.

Read on to know more about the APR, how it differs from the interest rate, and how you can calculate it.

What Do You Mean by the Personal Loan Interest Rate?

Interest rates are the rates a lender charges on the amount you borrow. These rates are based on the principal amount you borrow, your credit history, the duration of your loan and several other factors. It is expressed in a percentage of the loan amount you borrow from the lender.

For example, if you get a personal loan at a 15% interest rate of ₹1 Lakh for one year. Using the formula of compound interest, your repayment amount will be ₹1.15 Lakhs over the tenure, and your monthly EMI will be approximately more than ₹9,500.

Before opting for a lender, you need to compare various options and choose the one offering the lowest personal loan interest rate. This helps you minimize your interest outgo and overall loan expense.

Thanks to personal loan EMI calculators online, you can compare various loan offerings instantly from the comfort of your home. This further helps you zero in on a lender providing the lowest personal loan interest rate.

What is the Annual Percentage Rate of a Loan?

The annual percentage rate is the actual cost of borrowing. This includes your interest rate along with other costs such as processing fees, loan insurance, closure and other upfront charges you need to pay a lender.

It is for this reason that the annual percentage rate is higher than the interest rates. To help you understand APR better, consider a hypothetical example.

Assume you avail a personal loan at a 15% interest rate of ₹1 Lakh for one year. Add ₹2,000 as loan processing and origination charges. Your annual percentage rate will be 18.88%.

Hence, the total repayment amount at the end of tenure will be ₹1,18,880, and your monthly EMI will be approximately over ₹9,900. In simple words, while the interest rate measures only one factor, which is the fee for the amount you borrow, APR takes into account several parameters.

To sum up, the lower your APR is, the overall borrowing cost of your loan is also lower. Hence, understanding the difference between the interest rate and APR is crucial before applying for a loan.

Differences Between the Interest Rate and APR

APR is a bigger picture here as it plays an important role when calculating the total borrowing costs. This is because APR is inclusive of all the other charges you pay on your personal loan.

For example, assume you applied for credit at the lowest personal loan interest rate of 15%. You may expect to pay only 15% of the principal amount as interest. However, when additional fees are added to your loan charges, your final annual percentage rate might increase to 18.88%.

Hence, understanding the difference between the interest rate and the annual percentage rate is crucial before you agree to the lender’s terms. According to the Truth in Lending Act (TILA), leaders must disclose both interest rates and APR when you approach them for loan details.

Furthermore, knowing the actual borrowing cost helps you compare across lenders and choose the right offer that perfectly aligns with your finances. While some lenders may offer the lowest personal loan interest rate, they may charge you a higher upfront fee, increasing your total borrowing costs.

Hence, APR presents more accurate information on the loan offer, helping you choose the right lender.

Easy Guide to Calculate the APR on a Personal Loan

You can calculate APR by keying in essential parameters such as the following:

  • Total interest levied
  • Applicable fees
  • Principal loan
  • Loan duration in days

You can calculate it manually using the formula given below:

APR = (Interest + Fees/Loan amount /Loan term in days x 365) x 100

If you are looking for a more convenient and faster method of calculating your APR, use our annual percentage rate calculator. APR calculators are free online tools that can help you compute the right value instantly.

Important Things to Note About APR

When you apply for a personal loan, check for a lower APR. Although lower interest rates offer numerous benefits, you need to consider other borrowing costs as well. Lower APR simply means a lower repayment amount, therefore, lower EMIs.

Another important feature to note is that APR is always higher than interest rates. In some cases, the APR may be equal to the interest rate. This happens if there are no additional charges on your loan. However, note that the annual percentage rate can never be less than your loan interest rate.

Is it possible to have a 0% APR?

0% APR is an introductory arrangement offered by a few lenders. If your lender offers 0% APR, this means you need not pay any interest for an initial period.

For example, lenders might offer up to 6 months of a 0% APR period. However, you still have to pay interest on your personal loan during this introductory period.

When taking a personal loan, the interest rate is an important factor to consider for your payment. However, the annual percentage rate gives you a better idea of the total amount you have to repay.

Calculating the annual percentage rate helps you understand how much you owe to the lender. In conclusion, understanding the difference between interest rates and annual percentage rates can give you a better idea when shopping for a personal loan.

Originally posted 2023-05-27 10:03:00.