Difference between APR and Rate
What is the difference between APR and Rate?
What is the difference between APR and Rate?
APR vs. Rate is an important factor to consider
when getting a loan. Here we will give you
a simple and easy to understand explanation
of the difference between APR and interest rate.
APR stands for Annual Percentage Rate and is the true
cost of borrowing money. It includes all the fees
and upfront costs associated with getting the loan.
The rate is simply the interest rate the lender
will charge you every month for the loan.
It excludes any upfront costs.
We'll make this extreme example to show you the
difference between APR and rate. You are borrowing
$100,000 at 15 percent interest over 30 years
and $10,000 in fees.
As stated, the interest rate is 15 percent (30 year fixed) and
your monthly payment using a mortgage calculator will be: $1,264.44.
This will be your mortgage payment regardless of APR.
However, you are not really borrowing $100,000, you are
paying them $10,000, so you are really only borrowing $90,000.
If you put that into your Mortgage Calculator you will
see that your monthly payment is only $1,137.99 - but your monthly will
be $1,264.44 as stated above, thus you have to calculate backwards to
see that true cost or APR of your loan is 16.745%
Thus, the APR is higher than the interest rate, because
you are in essence paying more for the loan and getting less.
So, now you know why APR is higher than Interest rate.
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