What is the difference between interest rate and APR?

When evaluating the cost of a loan or a line of credit, it is important to understand the difference between the advertised interest rate and the annual percentage rate (APR), which includes any additional costs or fees. The interest rate is the cost of borrowing principal, and this rate may be stated at the time of loan closing.

What is interest on a loan?

Interest is most often reflected as an annual percentage of the amount of a loan. This percentage is known as the interest rate on the loan. For example, a bank will pay you interest when you deposit your money in a high-yield savings account. The bank pays you to hold and use your money to invest in other transactions.

Is the annual percentage rate higher than the interest rate?

The annual percentage rate (APR) is almost always higher than the interest rate, as it includes other costs associated with borrowing the money. The federal Truth in Lending Act requires that every consumer loan agreement list the APR along with the nominal interest rate. 1 Lenders must follow the same rules to ensure the accuracy of the APR.

How is interest calculated?

In its most basic form, interest is calculated by multiplying the outstanding principal by the interest rate. The more complex aspect in calculating interest is often determining the correct interest rate. The interest rate is often expressed as a percentage and is usually designated as the APR.