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

APR vs Interest Rate on Personal Loans: Differences, Similarities, and Examples
Lauren Ward
Lauren WardUpdated October 12, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Understanding the difference between 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.

Personal Loan APR vs Interest Rate 

The main difference between a personal loan’s APR and interest rate is that the interest rate is part of the APR. Here’s a more in-depth look at the similarities and differences between interest rate and APR.
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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 with any closed-end credit account, which are loans 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, in order to compare offers apples-to-apples. Recommended: Is Personal Loan Interest Tax Deductible?

APR vs. Interest Rate on Revolving Credit Accounts

APR vs. interest rate on a personal loan is different than it is on a revolving credit account like a credit card. With credit cards, there is 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 like 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.Recommended: Revolving Credit vs Installment Loans: The Differences

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 is 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 6% 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%)
You can often get your credit scores for free through your bank or credit card issuer. If not, you can go to myFICO and purchase your scores. 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 DTI is the percentage of your income you spend each month 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 lenders typically like to work with is usually around 43%. However, some banks may accept a higher DTI if you have a strong income.

The Takeaway

A loan’s interest rate is the cost of taking out the loan, but it is 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 a loan. With this information in hand, borrowers should never be blindsided by the costs of any loan.  If you’re curious about what type of personal loan APRs you might qualify for, Lantern by SoFi can help. With our easy online lending tool, you can quickly compare personal loan offers from multiple lenders with just one short application, and without making any type of commitment.

Frequently Asked Questions

What is the difference between APR and interest rate on a personal loan?
What is a loan APR vs interest rate?
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About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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