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What’s the Difference Between Interest Rate and APR?

When it comes to taking out a loan — especially a big one, like a home loan — it’s in your best interest to know exactly what each and every word of the loan agreement means. When it comes to APR vs. interest rate, many borrowers think they’re interchangeable… but it’s actually a little more complicated than that.

Here’s the difference in a nutshell: APR is an expression of the annual cost of a loan to a borrower over the course of a year, including interest as well as fees. Interest Rate, on the other hand, is simply the percentage of the loan amount the lender charges for the right to have the money up front. In other words, it’s only one part of the total cost of the loan — whereas APR includes everything.

Let’s take a closer look.

What is interest?

Interest is an amount of money a lender charges a borrower for their services — essentially, the money you pay in order to get up-front access to funds you don’t actually have. Interest is usually expressed as a percentage of the borrowed total, and may be applied to the loan on a daily, monthly, or yearly basis. 

Some loans, including mortgages and personal loans, use simple interest, which means the fees are charged only on the principal balance (the amount you borrowed in the first place). But other types of loans and lines of credit, including credit cards, use compound interest, which is charged against not only the amount you borrowed, but also the interest you’ve already accumulated. That’s one reason it can be so easy to spiral into credit card debt.

What does APR stand for?

APR stands for Annual Percentage Rate, and is also expressed as a percentage (which you might have guessed from the name). APR does include interest, which is why so many consumers get confused and think the APR is the interest rate. However, APR also includes other costs of the loan, such as origination fees, broker fees, lender fees, certain closing costs, discount points, and more. The APR percentage is what you can expect to pay for the loan over the course of a single year, so keep in mind that over the entire course of the loan term, you’ll likely pay more.

Lenders are obligated to offer borrowers a complete view of the costs of a loan over time thanks to the Truth in Lending Act, or TILA, which is why most consumer loans’ costs are expressed in APR. You can also ask to see your loan estimate, which should list the overall cost of the loan as well as details like your interest rate and monthly payment.

Annual Percentage Rate, or APR, vs. Interest Rate

Bottom line: APR is an expression of the true cost of a loan that’s more complete and comprehensive than the mere interest rate. It shows borrowers what they can expect to pay for the loan over the course of a single year — so to get a handle on what you’ll pay over the entire life of the loan, use an APR calculator or ask to see a loan estimate.

When diving deeper into interest rates and APR, it’s important to consider the pitfalls of comparing the two. For example, let’s say a borrower is rate shopping with 2 different lenders. Lender A offers a 3.00% interest rate and Lender B offers a 2.75% interest rate. On the surface, the 2.75% interest rate looks better right? But when you look closely, Lender A’s APR is 3.100%, while Lender B’s is 3.25%. Why is that? It may be because Lender B is charging more upfront fees, like origination or discount points. So Lender B’s mortgage might end up being more expensive than Lender A’s in the long run. 

Speaking of loans — Quontic Bank has some excellent options even for non-traditional borrowers whose paperwork might not line up in exactly the way most lenders look for. Whether you’re a self-employed individual looking for a mortgage or a foreign national hoping to invest in property on U.S. soil, our Non-Traditional Mortgages are a line of mortgage loans specially designed for those who tend to fall between the cracks. We consider the applicant’s full, holistic financial background — rather than just glancing at your credit score and stamping a “yes” or “no.” 

As one of only 3% of U.S. banks with a Community Development Financial Institution (CFID) certification1, it’s part and parcel of our mission to get much-needed financial products into the hands of underserved communities who deserve them. Whether you’re hoping to refinance at a lower interest rate or you’re a first-time homebuyer looking for the best mortgage on the market, we can help. Better yet, we accept up to 100% gift funds for your down payment. Our mortgage offers help people become homeowners every day — and we see you as more than just a name and a credit report.

Still have questions? Contact our team of customer service professionals today!


1All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of December 24, 2021.

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