Understanding the difference between APR vs. interest rate is important before you start shopping for a loan. Both factors significantly affect the total amount you will pay for a loan.

While many people use these terms interchangeably, a few key differences separate them. Understanding them gives you a better idea of how much your loan will cost you over time.

Keep reading to learn the difference between the two, which is more important, and where to find fair rates for your small business loan.

What Is Interest?

Interest is payment from a borrower or lender to a lender or borrower for the use of money. In other words, it is the price of money borrowed.

The interest the lender will charge will depend on several factors, like the type of loan, the term, how much you borrow, current market rates, and your credit history.

What Are Interest Rates?

A loan’s interest rate is the amount of interest that your lender charges you to borrow money. Most lenders express the interest rate as a percentage of the remaining principal balance of your loan.

#DidYouKnow
The principal is the amount of money borrowed.

An interest rate can be variable or fixed:

• Variable interest rate change over time. Typically, variable interest rates increase as you continue to pay off your loan.
• On the other hand, fixed interest rates remain static for the entire loan term. If you have a fixed interest rate, your monthly payments will stay the same for the whole loan term.

How are interest rates calculated?

Interest Rate = [Interest paid / (Principal / time) ] x 100

What Is APR?

APR stands for Annual Percentage Rate.

The annual percentage rate represents the total annual cost of borrowing money from your lender. This includes interest and fees, closing costs, and any other expenses charged to you by your lender.

It effectively gives you the “all-in” cost of the loan annually.

#DidYouKnow
Usually, lenders divide the fees evenly by the number of payment periods.

For example, if you take out a loan, your interest rate could be 11%, but your APR might be 11.5%.

The APR is a more accurate representation of how much your loan will cost over time because it combines both the cost of the interest rates and fees.

How is APR calculated?

APR = [ (Fees + Interest) / Principal ] / Number of days in the loan x 36500

What Is The Difference Between Interest Rate And APR?

While both APR and interest rates help applicants understand the cost of borrowing money, there are a few important differences to note.

The interest rate only reflects the cost of borrowing money itself and doesn’t take into account any other fees or charges.

In contrast, APR includes the interest rate and other fees and costs associated with taking out a loan, such as points, closing costs, and lender fees.

This makes APR a more accurate representation of the actual cost of borrowing money.

#DidYouKnow
The Federal Truth in Lending Act (TILA) requires all lenders to disclose their interest rates and APRs.

APR vs. Interest Rate: An Example

Let’s say you’re considering a $100,000 loan with a 4% interest rate and a 1% origination fee.

The APR on this loan would be 5%. This means that, in addition to paying back the $100,000 you borrowed, you would also need to pay $5,000 in origination fees for a total cost of $105,000.

Interest Rates And APR For Different Products

While interest rates and APRs can vary slightly, depending on the lender, most financial products have interest rates and APRs in the same general range.

Here are the average interest rates and APRs for some popular financial products, including personal loans, short-term business loans, mortgages, auto loans, and credit cards.

Note: Depending on the product, APR’s additional fees may include origination fees, annual fees, mortgage broker fees, closing costs, discount points, and more.

*Credit Cards

For most financial products, APRs and interest rates are different. However, for credit cards, they are often the same thing.

Credit card companies generally express their interest rate as an APR. While some credit cards may have annual fees or other charges, these are seldom included in the APR as not all cardholders will incur the same fees.

#DidYouKnow
You can use a loan to pay off credit cards.

Should You Focus On Interest Rates Or APR?

When it comes to shopping for a loan, which is more important: interest rate or APR?

In almost all cases, you should compare annual percentage rates when comparing loans from different providers.

APRs are there for a reason: to give borrowers a clear picture of how much their loan will cost over its entire term. APRs make it easier to calculate your monthly payments and the annual cost of the loan.

Interest rates do not include any additional fees you may have to pay. They can be misleading as two loans can have the same interest rate while having different APRs.

Generally, the only instance in which you should compare interest rates is if you plan to negotiate fees with your lender. Interest rates can provide a baseline rate, which you can use to negotiate lower fees.

Ultimately, loans with lower APRs will cost you less over time, assuming they have fixed rates. As such, comparing APRs is typically more helpful than comparing interest rates.

An Amazing Alternative With Fair Interest Rates & A Competitive APR

Are you looking for a business microloan with a fair interest rate and low APR?

At Camino Financial, we provide microloans to help small business owners get the financing they need to grow their businesses.

Our loan specialists will work to match you with the right financing product so you can comfortably make your monthly payments without stressing your finances.

• The maximum loan amount for our business loans is $35,000. But we have other products that offer up to $400,000.
• Interest rates ranging from 31.55% to 54.90%.
• One low closing fee of 6.99% of the total loan amount, this results in a low APR
• Fast loan application process and funding, with a maximum time of 10 days
• No collateral required
• Fixed rates and monthly payments, so you are in control of what you pay
• We use Plaid as part of our loan process, which keeps your information secure and private

Also, there’s a key factor to consider regarding our interest rates. After 8 months of timely payments, you can apply for a second loan for a more significant amount and at a lower interest rate.

Ready to get started?