When it comes to borrowing money, whether it’s for a mortgage, car loan, or credit card, it’s important to understand the true cost of borrowing. Two terms that are often used are APR and interest rate, but what do they really mean?
Interest Rate
The interest rate is the cost of borrowing the principal amount of money. It’s expressed as a percentage of the loan amount and is usually fixed or variable depending on the type of loan. For example, a fixed-rate mortgage will have the same interest rate for the entire loan term, whereas a variable-rate mortgage will have an interest rate that can fluctuate over time.
When comparing loans, it’s important to look at the interest rate to get an idea of how much you’ll be paying in interest over the life of the loan. However, the interest rate doesn’t take into account any additional fees or charges associated with the loan.
APR
The APR, or Annual Percentage Rate, is a more comprehensive measure of the true cost of borrowing. It includes not only the interest rate but also any additional fees or charges associated with the loan. This can include things like origination fees, closing costs, and mortgage insurance premiums.
The APR is also expressed as a percentage and is required by law to be disclosed to borrowers. It gives borrowers a more accurate picture of the total cost of borrowing and can help them compare loans more effectively.
Which is More Important?
Both the interest rate and APR are important factors to consider when borrowing money. The interest rate will give you an idea of the cost of borrowing the principal amount, while the APR will give you a more accurate picture of the total cost of borrowing.
When comparing loans, it’s important to look at both the interest rate and APR to determine which loan is the best fit for your needs. For example, a loan with a lower interest rate may have a higher APR if it includes additional fees and charges.
Understanding the true cost of borrowing is essential when making any financial decisions. While the interest rate is an important factor, it doesn’t give you the full picture of the cost of borrowing. The APR takes into account all additional fees and charges associated with the loan, providing a more accurate measure of the total cost of borrowing.
When comparing loans, be sure to look at both the interest rate and APR to make an informed decision about which loan is the best fit for your needs and budget.
