Before you start shopping for a loan, it’s important to understand the difference between interest rate and APR. Both of these factors play a major role in the total amount you will pay over the course of your loan.
While many people use these terms interchangeably, there are a few key differences that separate them. By understanding them, you’ll get a better idea of how much your loan will cost you over time.
Keep reading to learn the difference between interest rate and APR, which is more important, and where to find fair rates for your small business loan.
What Is the Difference Between Interest Rate and APR?
Though many borrowers think that interest rate and APR are the same things, there are a few important differences to note.
Your interest rate is the amount of interest that your lender charges you to take out a loan. The interest rate is typically expressed as an annual percentage of the remaining principal balance of your loan.
Interest rates can be variable or fixed:
Variable interest rates change over time. Typically, variable interest rates increase as you continue to pay off your loan.
Fixed interest rates, on the other hand, remain static for the entire loan term. If you have a fixed interest rate, your monthly payments will remain the same for the entire loan term.
Variable interest rates are often better if you plan to pay off your loan early so that you can take advantage of low introductory rates. Fixed rates are often preferable for long-term loans, as they are more predictable and are often cheaper in the long term.
Annual Percentage Rate (APR)
The annual percentage rate (APR) 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.
In other words, your APR combines the fees paid upfront with interest for a loan. It effectively gives you the “all-in” cost of the loan on an annual basis. The fees themselves are divided out 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%. Your APR is a more accurate representation of how much your loan will cost over time.
When shopping for loans, it’s often better to compare APRs rather than interest rates in order to determine your best option. By only comparing interest rates, you may end up being caught off guard by additional fees later on. It’s possible for two loans to have the same interest rate but different APRs.
The Federal Truth in Lending Act requires all lenders to disclose their APRs.
Interest and APR in Different Financing 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 of the most popular financial products, including personal loans, business loans, mortgages, and credit cards.
Note: For APRs, additional fees may include origination fees, annual fees, closing costs, discount points, and more.
|Average Interest Rate||Average APR|
|Personal Loans||5% to 36%||10% to 28%|
|Business Loans||2.55% to 5.14%||4% to 13%|
|Mortgages (30-year Fixed)||3% to 7.84%||3% to 7.84%|
|Credit Cards* (Cash Back)||13.24% to 22.99%||13.24% to 22.99%|
*Interest Rate vs. APR on Credit Cards
For most financial products, APRs and interest rates are different. However, for credit cards, APR and interest rates are often the same thing.
Credit card companies generally express their interest rates as APRs. 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.
Should You Focus on Interest Rate 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 that you may be required to pay. Interest rates 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 can be used to negotiate lower fees.
Ultimately, loans with lower APRs will cost you less over time, assuming rates are fixed. As such, comparing APRs is typically more useful than comparing interest rates.
How to Calculate Interest Rate and APR
Do you want to calculate these numbers? Use these formulas:
Interest rate formula
Interest Rate = [Interest paid / (Principal / time) ] x 100
APR = [ (Fees + Interest) / Principal ] / Number of days in the loan x 36500
Keep reading: How to Lower Your Interest Rate on Your Business Loan
Camino Financial: Fair Interest Rates & Low APR
Looking for a business loan with a fair interest rate and low APR?
At Camino Financial, we provide small business loans 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.
- 12% to 40% for Small Business Loans (equivalent to 1% to 2.83% monthly). The maximum loan amount for our business loans is $400,000.
- One low closing fee: from 5% to 6.99% of the total loan amount, this results in a low APR
- No collateral required
- Fixed rates and monthly payments so you are in control of what you pay
- Fast application and funding, with a maximum time of 10 days
- Free business resources
To have a clearer picture, you can learn here how we calculate your interest rate.
Also, there’s a key factor to consider when it comes to our interest rates: after 8 months of timely payments towards your loan, you can apply for a second loan for a larger amount and at a lower interest rate. In other words, the interest rate you pay at the beginning can significantly be reduced after a few months.
Though you might be able to find slightly lower rates elsewhere, you won’t find these benefits in other financing products. Ready to get started?