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When researching personal loans, you may see the terms annual percentage rate (APR) and interest rate used interchangeably. However, they are not the same thing. The interest rate refers to the cost of borrowing money, expressed as a percentage of the principal amount, but it doesn’t include any fees or charges.
APR, on the other hand, includes not only the interest rate but also other fees and charges you may incur when borrowing money. This makes the APR more important to look at than the interest rate.
Read on for a closer look at APR vs. interest rate and what it means when these two numbers are different and when they are the same.
Key Points
• The interest rate on a personal loan is the cost of borrowing money, expressed as a percentage of the principal, and it excludes fees.
• The APR includes both the interest rate and additional fees (e.g., origination or processing), making it the truest measure of the cost of a loan.
• If your APR is higher than your interest rate, it means that lender fees are included; if they match, there are no extra fees.
• On revolving credit (such as credit cards), APR and interest rate are the same, but interest is usually compound, making debt more costly over time.
• The average personal loan APR rate is about 12.00%, but building your credit score, lowering debt, and limiting hard inquiries can help secure a lower rate.
What Is Interest?
Interest is the cost you pay for the privilege of taking out a loan — the money you’ll owe along with the principal, or the amount of money you’re borrowing.
Interest is expressed as a rate: a percentage that indicates what proportion of the principal you’ll pay on top of the principal itself. Interest may be simple — charged only against the principal balance — or compound — charged against both the principal balance and the accrued interest. Typically, personal loan rates are an expression of simple interest.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options.
Loan APR vs Interest Rate
So what’s the difference between an APR vs. an interest rate?
APR specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. It also includes any additional charges on top of interest, such as origination or processing fees, which a straight interest rate does not.
In other words, APR is a specific type of interest rate expression — one that’s more inclusive of additional costs.
| Interest Rate | APR |
|---|---|
| Expression of how much will be paid back to the lender in addition to repaying the principal balance | Expression of how much will be paid back to the lender in addition to repaying the principal balance |
| Includes interest only | Expresses the cost of the loan over one year, including any additional costs, such as origination fees |
Why Is My Personal Loan APR Different Than the Interest Rate?
If your personal loan’s APR differs from its interest rate, it means there are additional fees, such as origination fees, included in the total amount you’re being charged. If there were no fees, the APR and interest rate would be identical.
How Important Is APR vs Interest Rate?
When shopping around for loans, the APR is generally more important than the interest rate because the APR reflects the true cost of the loan — it accounts for interest as well as any fees tacked on by the lender. Looking at the APR also allows you to compare two loan offers apples to apples. One loan may have a lower interest rate than another loan, but if the lender tacks on high fees, then it may not actually be the better deal.
APR vs Interest Rate on Revolving Credit Accounts
Personal loans aren’t the only financial products that involve an APR and interest rate. Revolving credit accounts — including credit cards — also have interest rates expressed as APR. However, with credit cards, these two rates are the same: APR is just the interest rate, and the terms can be used interchangeably.
Credit card issuers may charge other fees, such as cash advance fees, late fees, or balance transfer fees, as applicable to individual usage. But it’s impossible to predict the type or amount of fees that might be charged to any one cardholder.
Although these two expressions are the same, it’s important to understand that the interest rate on credit cards and other revolving credit accounts is usually compound interest, which is why it can be so easy to spiral into credit card debt. When interest is charged on the interest you’ve already accrued, the total goes up quickly.
A single credit card account can have multiple APRs, depending on how the credit is used.
• Purchase APR is applied to general purchases.
• Cash advance APR is the rate charged for cash advances made to the cardholder.
• Balance transfer APR may begin as a low or zero promotional rate, but it increases after the introductory period ends.
• Penalty APR may be charged if a payment is late by a predetermined number of days.
💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.
What Is a Good Interest Rate for a Personal Loan?
The interest rate on your personal loan — or on any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income), the lender you choose, how big the loan is, and whether or not it’s secured with collateral.
The average APR personal loan rate is currently about 12.00%. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.
Getting a Good APR on a Personal Loan
To get the best rate on your personal loan, there are some financial factors you can influence over time. Here are some action items to consider.
Building Your Credit Score
It’s been said before, but it’s true: The higher your credit score, the better your chances of achieving favorable loan terms and lower interest rates — not to mention qualifying for the loan at all. While there are loans out there for borrowers with bad credit and fair credit, building your credit profile can make borrowing money more affordable.
Paying Down Your Debts
One way you may be able to build your credit is to pay down your debts. Paying down debt can also improve your chances of being approved for a loan because lenders look at your debt-to-income ratio when determining your eligibility for a loan. What’s more, paying down debt can make keeping up with your monthly loan payments a lot easier, since you’ll have more leeway in your budget.
Being Careful When Applying for Credit
Applying for too much credit at once can be a red flag for lenders and reduce your credit score, so if you’re getting ready to apply for a personal loan, auto loan, or mortgage, try to limit how many times you’re having your credit score pulled. Typically, prequalifying for a loan involves a soft credit pull, which won’t impact your credit.
While credit scoring models do allow for rate shopping, it’s still a good idea to compare multiple lenders over a limited amount of time — 14 days is recommended — to find the lender that works best for your financial needs. If done in a short window of time, multiple hard credit pulls for the same type of loan will count as just one.
Recommended: Soft vs Hard Credit Inquiry
The Takeaway
Personal loans and other financial lending products come at a cost: interest. That’s the amount you’ll pay on top of repaying the principal balance itself. Interest is expressed in a percentage rate, most commonly APR, which includes both the interest and any other fees that can increase the cost of the loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Why is my personal loan APR different than the interest rate?
If the annual percentage rate (APR on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others. No fees mean that the two rates will be the same.
How important is APR vs interest rate?
The annual percentage rate (APR is generally the more important figure to look at, since it includes additional costs incurred in getting the loan, such as fees. The APR will give you a more holistic picture of the price of the loan product.
What is a good APR and interest rate for a personal loan?
Personal loan interest rates vary widely but currently average around 12% APR. Depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender, the rate you receive could be higher or lower.
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