APR vs. Interest Rate: Compare Loan Cost in Percentages and Dollars

Key Takeaways

Interest rate and APR measure different parts of borrowing cost.
Compare APRs with APRs, then check dollars received, total repayment and term.
A smaller payment or lower advertised rate does not by itself establish the cheaper loan.

What is the difference?

The interest rate measures the rate charged for using borrowed money. Annual percentage rate (APR) expresses an annualized borrowing cost that includes interest and applicable loan charges. The CFPB explains this distinction in its auto-loan guidance; its personal-installment guidance separately warns that origination and other fees can add to cost.

Do not compare one offer’s advertised interest rate with another offer’s APR. Request the applicable written disclosures for the actual offer, not only the starting rate in an advertisement.

Use a dollar comparison too

Consider this fictional illustration: a loan lists $1,000 as the amount borrowed, deducts a $100 origination fee and requires twelve $100 payments. You would receive $900 and make $1,200 in scheduled payments. The cash difference is $300. Those figures alone are not an APR calculation; the timing and applicable disclosure rules also matter.

The illustration is not a lender quote. In particular, it does not imply that a named high-cost lender offers a 6% rate or any other unverified price.

Write these figures beside each offer

Cash you actually receive and any fees deducted upfront.
Disclosed APR and whether the interest rate can change.
Payment amount, frequency, number of payments and final due date.
Total scheduled payments and separate charges not included in that total.
Late-payment costs, optional add-ons, collateral and prepayment terms.

Compare the same borrowing amount and similar terms where possible. APR is useful, but a longer loan can produce more total dollars of interest even at a lower annual rate.

Keep the cost test tied to your budget

A low monthly payment may be achieved by extending repayment. Check the final payoff date and the money left after essentials at every due date. If fees are unclear, ask the lender to explain them in writing before accepting.

APR is not a guarantee that the loan fits your budget, and it is not a promise that every potential late, bank or optional-product charge has been captured. Keep the disclosure and repayment schedule so you can compare the agreement with what you were offered.