Interest Rate Vs. APR Meaning: Knowing the Difference

When we talk about interest rate vs APR meaning: knowing the difference, some folks might wonder the fuss about, because to them both seem like one and the same thing. Although both terms describe how much you have to pay, when you are taking out mortgage costs, they are not the same thing.

Interest Rate Vs. APR Meaning: Knowing the Difference

Interest Rate Vs. APR Meaning: Knowing the Difference

Interest Rate

This is the cost of borrowing the principal loan amount, it can either be a variable or fixed rate, which is always expressed as a percentage.

How Banks Determine Your Interest Rate

Lenders are known to set their own interest rates and fees within legal limits, with different borrowers getting different rates.

The interest advertised online is those reserved for customers with the highest credit scores. If you do not fall in that category, the rate you are offered will be dependent on a number of factors like:

  • Firstly, the Credit score
  • Secondly, the Loan amount
  • Debt-to-income ratio
  • Down payment amount
  • Length of the loan term (the shorter the repayment term, the lower the rate)
  • The type of credit you applied for
  • The fees you pay for a loan
  • Where you reside (this is because the interest rate in some regions of the country is higher than in others).
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APR

The APR is a broader measure of the cost of a mortgage. This is because it includes the interest rate, plus other costs like broker fees, discount points as well as some closing costs, which is expressed as a percentage.

The fees associated with your loan (and figured into your APR) is based on the type of loan you have applied for. Here are the fees you should be expecting:

Application Fee:

This is the fee some lenders charge to apply for a loan.

Origination Fee:

This is an upfront fee designed to compensate the lender for putting a loan together.

Underwriting Fee:

It is a fee charged for the underwriter who reviews your application and decides whether or not to grant the credit.

Document Fee:

It is a fee lender often factor into the loan to cover the effort it takes to draw up the documents you will sign.

Dealer Prep:

This is a fee that Auto dealers normally slip into their APR, stating that they have earned it for preparing a vehicle for sale.

Processing Fee: A general term used for any extra fees a lender expects you to pay. Most of them are negotiable.

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Why Banks Publish Annual Percentage Rates

Banks are known to charge whatever interest rate they want. Since there are no regulations in place, they routinely earned from 10% – 500% annually on mortgages and private loans. Those who need a home loan will have to work with mortgage lenders, who set the pace.

Interest Rate Vs APR – Which is More Important?

Both interest rate and APR are important because they tell you important things about a loan. But you can still compare the APR of a loan to its interest rate.

  • Firstly, when it comes to calculating APR, all lenders are to follow the same rules (with just a couple of variations) with this, you have a better sense of the true cost of a loan with APR, and you can compare it to other loans.
  • Secondly, you get an idea of how much a loan will cost at a glance.
  • Also, you get to see how much you will pay in fees.

Both interest rate and APR, tells you how much you have to pay for a loan, even though the APR tells you a lot more. Thus the APR is generally more useful.

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