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What Is the Difference Between APR and Interest Rate on a Personal Loan?

By Jamie Cattanach · June 22, 2022 · 5 minute read

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What Is the Difference Between APR and Interest Rate on a Personal Loan?

Even if you’ve had personal loans explained to you in simple terms, there’s a lot to know when you’re making such a big financial decision. One common misunderstanding for borrowers is the difference between the loan’s APR and the loan’s interest rate.

Although these two terms are often used interchangeably, they refer to slightly different concepts. Let’s take a closer look.

What Is Interest?

For starters, let’s talk about 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 in 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 accrued interest itself. Typically, personal loan rates are an expression of simple interest.

Recommended: Interest Rate Definition: What You Need to Know

Loan APR vs Interest Rate

So now that we know what interest is and how it’s expressed, what’s the difference between an APR vs. interest rate?

APR stands for Annual Percentage Rate and specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. Furthermore, the APR 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 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, that indicates that 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?

No matter how it’s expressed, the interest rate on your loan is very important — because it’s how much you’ll pay in addition to the principal balance. That amount can add up very quickly. Let’s look at an example of a relatively simple personal loan.

Say you take out a personal loan for $5,000 to cover some home repairs. Assuming it’s a simple-interest loan with an interest rate of 5% and a term of five years, you’ll pay back a total of $6,250 — an additional $1,250 on top of the amount you needed in the first place.

APR vs Interest Rate on Revolving Credit Accounts

Personal loans aren’t the only financial product that involve 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 one and the same: APR is just the interest rate, and the terms can be used interchangeably.

Credit card issuers may charge other fees, e.g., 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 card holder.

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 precisely 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: the standard APR for general purchases.

•   Cash advance APR: the rate charged for cash advances made to the card holder.

•   Balance transfer APR: may begin as a low or zero promotional rate, but increase after the introductory period ends.

•   Penalty APR: may be charged if a payment is late by a predetermined number of days.

What Is a Good Interest Rate for a Personal Loan?

The interest rate on your personal loan — or any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income) as well as which lender you choose, how big the loan is, and whether or not it’s secured with collateral.

The average personal loan rate hovers between about 10% and 22% at the time of this writing, though some lenders may offer personal loans with interest rates as low as 5% to 6%.

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.

Improving Your Credit Score

It’s been said before, but it’s true: the higher your credit score, the better your chances are 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, improving your credit score can make your loan a lot more affordable over time.

Paying Down Your Debts

One way to significantly improve your credit score is to pay down your debts. And along with the opportunity to improve your credit, paying down debt will also improve your chances of being approved for a loan because your debt-to-income ratio is one factor lenders look at when qualifying you for a loan — not to mention the fact that it’ll make keeping up with your monthly loan payments a lot easier if you have more leeway in your budget.

Be Careful When Applying for Credit

Applying for too much credit at once can be a red flag for lenders and ding 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.

Credit scoring models do allow for rate shopping, however, so it’s still a good idea to compare multiple lenders over a limited amount of time — a 14-day period 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.

If you’re looking for a personal loan, whether to fund medical expenses, home repairs, or some other financial goal, SoFi Personal Loans may be the option for you. There are no origination or repayment fees with unsecured personal loans from SoFi, and there are a variety of terms offered to work with many budgets.

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FAQ

Why is my personal loan APR different than the interest rate?

If the APR on your personal loan is different than the interest rate, it means the lender is charging additional fees, such as origination fees or others.

How important is APR vs interest rate?

The APR is a particularly important figure to look at since it also includes additional costs, giving 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 can start as low as 5% depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender.


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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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Photo credit: iStock/Charday Penn
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