{"id":405,"date":"2024-11-06T09:00:25","date_gmt":"2024-11-06T09:00:25","guid":{"rendered":"https:\/\/flexmoney.com\/blog\/?p=405"},"modified":"2024-11-04T03:30:08","modified_gmt":"2024-11-04T03:30:08","slug":"what-is-apr-and-why-it-matters-for-borrowers","status":"publish","type":"post","link":"https:\/\/flexmoney.com\/blog\/what-is-apr-and-why-it-matters-for-borrowers\/","title":{"rendered":"What Is APR and Why It Matters for Borrowers"},"content":{"rendered":"

APR and interest rate<\/a> are two terms that are often used interchangeably, but they are actually very different. One describes the advertised rate of interest charged for borrowing money while the other includes interest and fees.<\/p>\n

Obviously, this can really matter when you want to take out a personal installment loan<\/a> or line of credit since it affects your overall cost of borrowing. Both are expressed as percentage rates, but don\u2019t be confused. They are not the same.<\/p>\n

Interest Rate Defined<\/h2>\n

Interest rates go up and down, depending on how the Federal Reserve sees the economy. In times of recession, interest rates tend to be low. In times of inflation, interest rates rise to curb borrowing. Lenders also decide how much they charge each borrower, based on their creditworthiness and lending policies.<\/p>\n

Most companies eagerly display their interest rate, or nominal interest rate, because it tends to be a lower amount than an annual percentage rate (APR). That\u2019s because the interest rate is only calculated on the principal of your loan. This is the amount you asked to borrow.<\/p>\n

As an example, you may want to take out a personal installment loan of $12,000 at a 8% interest rate. Your annual interest expense would be $12,000 x 8 = $960 per year, or $80 per month. However, this doesn\u2019t necessarily give you an accurate picture of what your loan will actually cost you, because it excludes additional costs the lender might charge you.<\/p>\n

What is APR (Annual Percentage Rate)?<\/h2>\n

Your annual percentage rate is usually higher than the advertised interest rate, because it includes other costs associated with borrowing. A common extra expense is an origination or administration fee of between 0.5% to 10% of your loan amount.<\/p>\n

Using the example mentioned above for a loan of $12,000, your loan could cost you between $60 and $1,200 more, on top of whatever your charges for interest on the loan. Some lenders also charge agency fees on top of interest and administrative costs.<\/p>\n

APR vs Interest Rate<\/h2>\n

All lenders must pre-disclose information such as the APR and the nominal interest rate for every consumer loan. They also follow the same rules to ensure potential borrowers have access to the same information.<\/p>\n

The Truth in Lending Act<\/a> is meant to promote honesty and clarity so borrowers can fully understand the cost of borrowing before they have a legal obligation to repay. By revealing the APR and the interest rate a borrower can get an idea of how much the lender is charging them in extra fees.<\/p>\n

Luckily, many lenders do not charge extra fees so the APR can be the same as the stated interest rate. Some lenders also offer a 0% APR deal, providing you have great credit.<\/p>\n

How is APR Calculated?<\/h2>\n

You\u2019ll need to consider the following factors if you want to calculate the APR on a personal installment loan yourself:<\/p>\n