Most of us know that interest rate and annual percentage rate (APR) are different from each other, but many people aren’t entirely clear on the difference. In order to clarify the difference between interest rate and APR, let’s talk about how they work.
Interest rate is the percentage a lender charges annually on the amount of money borrowed. It does include any type of fees or other charges.
If you were paying a 12% interest rate on a $1000 loan, you would owe $10 towards interest monthly. If this were a two year loan agreement, this would make a total monthly repayment of $41.66 (1000 divided by 24 months) towards the principal amount borrowed, and $10 towards interest, totallying $51.66 a month.
Looking at interest rate alone does not mean that interest will be the only expense you pay monthly or annually. Payments associated with home ownership often include more than the payments directly associated with repaying the home purchase price.
APR (Annual Percentage Rate)
Annual percentage rate is not the same as your interest rate. APR not only includes interest charged by the lender, but also other expenses. These can include broker fees, homeowners insurance payments, points and more that are also due over the length of the mortgage.
If you were paying a 12% interest rate on a $1000 loan, you would owe $10 towards interest monthly. There might also be other total expenses of $12 due monthly. These could be for specific types of services and fees associated with home ownership. If this were a two year loan agreement, this would make a total monthly repayment of $41.66 (1000 divided by 24 months) towards the principal amount borrowed, and $10 towards interest, and $12 towards other fees, totallying $63.66 a month.
APR is considered a more transparent and useful number when calculating future expenses, because it takes into account more variables.