APR versus interest rate
The interest rate is the percentage charged on the outstanding principal. Annual percentage rate, or APR, is an annualized cost measure that generally incorporates the interest rate and certain finance charges. That means APR may be higher than the stated interest rate when fees apply.
How to compare APR correctly
APR is most useful when offers have the same loan amount and similar repayment terms. If one offer lasts much longer, also compare total repayment. A lower APR does not automatically make a larger or longer loan affordable.
Simple comparison checklist
- Is the rate fixed for the entire term or variable?
- Which fees are included in APR?
- How much cash will actually be disbursed?
- What is the monthly payment and final payment?
- What is the total of all scheduled payments?
Representative example
Suppose two loans have the same principal and term. One has a lower interest rate but charges an origination fee; the other has no fee but a higher rate. APR helps reflect that tradeoff. The exact result depends on the figures and timing, so use the provider’s disclosures rather than a headline rate alone.