Interest Rate vs. APR: Why You Should Care About APR

Rate vs APRThe annual percentage rate, or APR, is the interest rate a borrower will pay over the life of the loan. It is higher than the interest rate the bank advertises because it includes the simple rate, plus other costs such as prepaid interest (most APR’s are calculated upon an assumption that the loan closes in the middle of the month and include 30 days prepaid interest), points and other costs.

Although your monthly payments will be calculated using the simple rate, you will actually be paying more than that over the life of the loan when you add in these other costs.

Both state and federal regulations require lenders to disclose the APR to all borrowers. Because the APR is the total interest rate the borrower will pay over the life of the loan, it is more useful to use when comparison shopping various loan products and lenders.


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