APR vs Interest Rate: You Free APR Guide

In this article, we’re explaining APR vs interest rate. Importantly, APR refers to the annual percentage rate, which is the total annualized cost of borrowing funds.

Below, we’ll share everything you need to compare APR vs interest rate figures, including how to calculate APR so you can assess any financing situation equally. We will also be answering common questions that we receive on the topic.

This article is part of our free series on how to obtain an overseas mortgage, which you can access now by clicking here.

Feel free to use the table of contents to jump ahead to the sections most relevant to you.

Table of Contents

  1. APR vs Interest Rate
  2. How Do I Calculate My APR?
  3. Frequently Asked Questions
  4. Do You Want Help Opening Bank Accounts?

APR vs Interest Rate

The main difference between an APR and an interest rate is that APR refers to Annual Percentage Rate (APR) which is the total cost of borrowing over a year while interest rate only refers to the percentage of interest the borrower will pay.

In other words, an APR and interest rate comparison look at two ways of expressing the costs associated with borrowing money from a financial institution.

The APR definition is a more complete look at the borrowing costs while the interest rate definition only looks at the rate of interest applied to the financing.

Needless to say, understanding interest rates is important if you are considering obtaining a loan or other financing options from a financial institution.

But, the importance of APR and interest rates in loans becomes even more clear when you are comparing multiple financing options against each other.

In the following section, we will look at how to calculate APR, which requires several pieces of important information.

How Do I Calculate My APR?

You can calculate your APR with just a few numbers, including the total amount you are borrowing, any additional fees and costs (including closing fees etc.), the interest rate you are paying on the loan, and the length of the loan.

Here is a quick breakdown of the inputs for calculating your APR.

Total Loan Amount

The total loan amount is the original amount borrowed from the financial institution.

Interest Rate

Interest rate refers to the percentage of interest that is applied to the loan amount that the borrower must pay.

Total Borrowing Cost

The total borrowing cost refers to the interest paid, additional fees, and any financing charges related to the loan.

Term of the Loan

The term of the loan (in years) refers to the total amount of time it will take for the loan to be paid off, including interest payments.

You then insert this information into the Annual Percentage Rate (APR) formula in order to calculate the APR on a loan. In addition to the formula, we also share the step-by-step process to ensure you calculate your APR correctly below.

Annual Percentage Rate (APR) Formula:

APR = [(Total Borrowing Cost/Total Loan Amount)/Number of Years)*100

Steps to Calculate Annual Percentage Rate (APR):

Step 1. Calculate total interest by multiplying the loan amount by the interest rate by the number of years (term) of the loan.

Step 2. Add all of the additional fees and charges to the total interest calculated in the previous step, which is the total borrowing cost.

Step 3. Divide the total borrowing cost by the total loan amount, which is the finance charge.

Step 4. Divide the finance charge by the total number of years (term) of the loan, which gives you the APR as a decimal.

Step 5. Multiple the APR decimal by 100 to receive the APR percentage.

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Frequently Asked Questions

Below are a few of the most common questions we receive from people looking into the difference between APR vs interest rate. If you have further questions you would like to ask our team, don’t hesitate to get in touch.

Which Is Better APR or Interest Rate?

APR is a better way to look at the total borrowing cost of a loan than the interest rate, this is because APR refers to the total borrowing costs including any additional fees, charges, and expenses that interest does not include.

Why Is Interest Lower Than APR?

Interest is lower than APR because it does not take into consideration any of the additional expenses, charges, or fees that a borrower may incur when obtaining and over the lifespan of a loan.

Why Is APR So Much Higher?

APR is so much higher because it includes all of the expenses that the interest rate does not include. Instead, interest rates are just one of the considerations that APR includes, which means APR is a more accurate measure of the total cost of borrowing.

Is APR Monthly or Yearly?

APR is yearly and means annual percentage rate. It is the total that a borrower will pay during a calendar year, including interest and any additional fees or charges.

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GlobalBanks Team
GlobalBanks Team

The GlobalBanks editorial team comprises a group of subject-matter experts from across the banking world, including former bankers, analysts, investors, and entrepreneurs. All have in-depth knowledge and experience in various aspects of international banking. In particular, they have expertise in banking for foreigners, non-residents, and both foreign and offshore companies.

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