APR vs Interest Rate on Personal Loans: Differences, Similarities, and Examples

Understanding the difference between an annual percentage rate (APR) and interest rate is key to getting the best possible deal on a personal loan. While these two numbers are related, they are not the same thing. The interest rate is the percentage of the loan amount paid to the lender, while the APR is the interest rate plus any additional fees charged by the lender. 

Read on to learn more about interest rate vs. APR on personal loans, what each rate includes and excludes, as well as how to qualify for a good rate on a personal loan.

Key Points

• Despite being comparable to one another, the APR and the interest rate on personal loans are not the same.

• It’s possible for two personal loans with the same interest rate to end up costing you different amounts because the APR takes into account the expenses not included in the interest rate.

• All consumer lending contracts, including credit cards, must present their interest rates as APRs, indicating that there’s no distinction between APR and interest rates for revolving credit accounts.

• The loan amount, the length of the payment period, whether the loan is secured or unsecured, and other factors are important to consider when looking for good APR and interest rates.

• Various factors, including but not limited to credit history, current loans, and debt, typically impact credit scores.

Personal Loan APR vs Interest Rate

The main difference between a personal loan’s APR and its interest rate is that the interest rate is included in the APR. Here’s a more in-depth look at the similarities and differences between interest rate and APR.

Similarities between personal loan APR vs. interest rate include:

• Measure borrowing costs: Both interest rates and APRs are used to quantify the cost of borrowing money.

• Expressed as percentages: Both are expressed as annual percentages.

• Impact on borrowing decisions: Both influence how much a borrower will ultimately pay and are important for making informed financial decisions.

Differences between personal loan APR vs. interest rate include:

• Components: Interest rates include only the cost of borrowing the principal amount, whereas APR includes the interest rate plus additional fees and costs associated with the loan.

• Purpose: The interest rate is just the cost of borrowing, whereas the APR offers a comprehensive measure of the total cost of borrowing.

Is My Personal Loan APR Different Than the Interest Rate?

Typically, yes. The reason is that a personal loan’s interest rate does not include all of the fees a lender may charge. It’s simply the percentage of the loan amount you're charged for borrowing. A loan’s APR, however, includes interest as well as other fees charged as part of the lending process, such as an origination fee. 

Personal loan origination fees typically range from 1% to 10% of the loan amount, depending on the lender, your credit history, your income, the loan amount, and the repayment term.

How Important Is the APR vs Interest Rate for a Personal Loan?

It can be extremely important. Because the APR includes the interest rate plus loan fees, it represents the true cost of borrowing. Depending on the lender, it’s possible for two loans with the same interest rate to cost you very different amounts in the end. This is not only the case with personal loans but also with any closed-end credit account, which is a loan that must be paid back (including interest and fees) by a certain date. Examples of closed-end credit products include:

• Auto loans

• Student loans

• Mortgages

• Personal loans 

Recommended: Open-End Credit vs Closed-End Credit: Differences and Similarities

What Is the APR on a Personal Loan?

The APR on a personal loan is the sum of the interest rate plus the fees calculated on a yearly basis and expressed as a percentage. Some lenders do not charge an origination or administration fee. If there are no fees, the loan’s APR is the same as the loan’s interest rate.

When you’re shopping for a personal loan or any type of consumer loan, you always want to look at the APR rather than the interest rate to compare offers apple to apple. 

Recommended: Is Personal Loan Interest Tax Deductible?

APR vs Interest Rate on Revolving Credit Accounts

The APR vs. interest rate on a personal loan is different from that on a revolving credit account like a credit card. With credit cards, there’s no difference between interest rate and APR — they are the same. Credit card issuers use the term “APR” because the federal Truth in Lending Act, which governs all consumer lending contracts, requires lenders to state their interest rates as APRs. 

With credit cards, however, the APR is just interest. You may have an annual fee or incur charges for things such as late payments or cash advances, but credit card issuers don’t include those in the APR. The reason is that it’s impossible to predict which cardholders will incur which fees.

What Is an Interest Rate on a Personal Loan?

The interest rate on a personal loan is the amount you pay the lender for giving you the loan. It’s expressed as a percentage and is applied to the loan’s principal amount. In most cases, personal loan interest rates are fixed, which means the rate won’t change over the life of the loan, and your monthly payments will remain the same.

What Is a Good APR and Interest Rate for a Personal Loan?

Just as every borrower has their own reasons to get a personal loan, a “good” APR will be different for every borrower. The APR you’ll pay will depend on the lender as well as your qualifications as a borrower and can range anywhere from 8% to 36%. 

Key factors that affect your personal loan’s interest rate include:

• Chosen lender

• Your credit score and history

• Loan amount

• Length of repayment

• If the loan is secured or unsecured by collateral 

• The current cost of borrowing (i.e., federal funds rate)

Getting a Good APR on a Personal Loan

To get the best personal loan rates, borrowers should pay particular attention to both their credit score and their debt. 

Credit Score 

A good credit score is crucial for receiving a good APR on a personal loan. In fact, a borrower’s credit score is so important that there are even personal loans geared toward borrowers of different credit profiles. Score ranges vary depending on the scoring model used, but a “good” credit score is generally 670 to 739. If you don’t have what a lender is looking for, you may be declined for a loan altogether. 

The reason behind many borrowers’ low credit scores is their payment history. At 35%, payment history is the biggest contributor to a borrower’s score and reflects how well a person has made on-time payments throughout their credit history. 

Other factors that influence a credit score include:

• Amount owed (30%)

• Length of credit history (15%)

• New credit (10%)

• Credit mix (10%)

If you feel your score is lower than it should be, you may want to check your credit report for any errors. You can access your credit reports for free through AnnualCreditReport.com. If you see any false information on any of your credit reports, report it to the credit bureau as soon as possible to have it removed. Until it’s fixed, you may receive higher APRs than you should.

Debts

If a borrower has too much debt, that debt poses a risk to lenders because it increases the odds of a borrower defaulting on a loan. Therefore, borrowers who want to receive a good APR should lower their debts as much as possible before applying for a loan. This includes: 

• Decreasing your credit utilization ratio: The credit bureaus like to see a credit utilization ratio below 30%. To determine your credit utilization ratio, add up all of your credit card debt and add up all of your credit card limits. Next, divide your debt by your limit to get your credit utilization ratio. 

• Decreasing debt-to-income (DTI): Your debt-to-income ratio is the percentage of your income you spend on your monthly debts, including mortgage, car loan, student loan, credit cards, and child support. To calculate DTI, add up all of your monthly debt payments and divide that number by your monthly pre-tax income. The highest DTI that lenders typically like to work with is usually around 36%. However, some banks may accept a higher DTI if you have a high income.

The Takeaway

A loan’s interest rate is the cost of taking out the loan, but it’s not the total cost. The interest rate doesn’t include any fees, such as an origination fee. To understand the true cost of a personal loan, you’ll want to look at its APR, which reflects both the interest rate plus any fees. Lenders are legally required to post a loan’s APR in addition to the interest rate when disclosing any details about it. With this information in hand, borrowers should never be blindsided by the costs of any loan.