Understanding APR can help you make a more informed borrowing decision.
What Does APR Mean?
APR stands for annual percentage rate. It expresses borrowing costs as an annualized percentage and provides a standardized way to compare credit products.
Depending on the product and applicable rules, APR can account for certain finance charges in addition to the interest rate.
Interest Rate vs. APR
The interest rate represents the rate charged for borrowing the principal. APR provides a broader standardized measure of borrowing cost.
That's why you might occasionally see a loan with an interest rate that's lower than its APR.
Why Fees Matter
Some personal loans have origination fees. For example, imagine you're approved for a $20,000 loan with an origination fee.
Depending on how the lender structures the transaction, that fee could affect the amount of proceeds you actually receive or your overall borrowing cost. Always review the lender's disclosures.
Don't Compare Monthly Payments Alone
Suppose you're comparing:
Loan A: Higher payment, shorter term
Loan B: Lower payment, longer term
Loan B may initially seem better because the monthly obligation is lower. But if you're making payments for substantially longer, you could pay more interest overall. Compare the total cost.
Five Numbers to Compare
Before choosing a personal loan, examine:
- Loan amount
- APR
- Monthly payment
- Repayment term
- Total repayment
Also review applicable fees and prepayment terms.
Fixed Rates Can Make Budgeting Easier
If a personal loan has a fixed rate and fixed payment, your required principal-and-interest payment generally remains predictable throughout the repayment period.
That can make budgeting easier than carrying a variable revolving balance.
The Lowest APR Isn't Always Available to Everyone
Advertised rates often represent the most favorable pricing available to highly qualified borrowers.
Your actual rate may depend on your credit profile, income, debt, and other underwriting factors.