When dealing with loans (both fiat and crypto), there are two terms that will often come up: ‘interest rate’ and ‘annual percentage rate’ (APR). They are frequently seen as interchangeable by many due to them referring to similar concepts. However, when it comes to calculation, they have their fair share of subtle differences. Evaluating the line of credit or a loan’s cost requires understanding what sets the interest rate apart from the APR, including additional fees or costs.

 

Interest Rates

 

The interest rate (aka. the advertised rate) is applicable for the calculation of your loan’s interest expense. For instance, imagine that you were pondering the idea of obtaining a mortgage loan for $200,000 with a 6% interest rate. In this case, your annual interest expense would equal out to $12,000. Alternatively, it would be a monthly payment of $1,000.

 

Interest rates are relevant to a majority of borrowing or lending transactions. Individuals may borrow money so that they can buy homes, launch or fund businesses, provide funding for projects, or pay college tuition. Businesses typically take loans as a way to fund capital projects and extend their operations, and they do so by purchasing fixed and long-term assets. These normally include land, buildings, and machinery. Repayment of borrowed money is either in periodic installments or through a lump sum by an established date.

 

APR

 

On the other hand, the APR is a more effective rate to take into consideration when conducting a loan comparison. The APR usually includes the loan’s interest expense, as well as the fees and other costs that are important for acquiring the loan. Some of these fees are closing costs, broker fees, rebates, and discount points, which are often expressed as a percentage.

 

The APR must be equal to or greater than the nominal interest rate. The only exception to this rule is in the event of a specialized deal where a rebate is offered by the lender on some of the interest expense.

 

Which is more important?

 

Both the APR and interest rate will inform you about the fees needed to pay in order to get a loan. However, the APR consists of all lender fees, therefore making it much more useful. With that said, it would be smart to compare them both. If, for example, you are curious about what your monthly payment is, you will need to look at the interest rate as opposed to your loan’s APR. This is primarily due to many of the fees in the APR being paid up-front instead of monthly.