APR vs. Interest Rate: What's the difference? Is it important to know? How do lenders calculate both? Which one should I use? These are all great questions!
The nominal interest rate, or advertised rate, refers to the percentage you must pay for a specific period to borrow money from a lender. The interest rate is represented as a percentage, and it can be either fixed or variable. While the interest rate can be set for any period, it is usually expressed as an annual rate.
Fixed Interest Rate
A fixed interest rate will never change, regardless of whether external factors that generally influence interest rates change, like financial markets. Thus, with a fixed interest rate, your interest rate remains the same for the loan duration.
Variable interest rate
A variable interest rate, on the other hand, can vary during your loan lifetime. That is because variable interest rates are tied to an index rate, and if such index rate changes, so does your interest rate.
Annual Percentage Rate
The Annual Percentage Rate, or APR, includes the interest rate of the loan and all other costs involved in it, such as fees, closing costs, discount points, etc.
The APR gives you a whole picture of how much it costs you to borrow money. However, it is essential to consider both the interest rate and the APR when comparing loans.
How Lenders Calculate the APR
Things are a little different when it comes to APR, and unfortunately, you have less control over it, as your lender controls all of the fees that, along with your interest rate, make up your APR.
APR vs. Interest Rate – Which One Should You Use?
For this reason, it is always important to consider both the interest rate and APR of the loan. As part of this equation, knowing or estimating whether you will repay the loan sooner or not makes a difference.
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