APR vs. interest rate: what's the difference?

When you compare loans, you'll usually see two percentages: an interest rate and an APR (annual percentage rate). They sound alike, but they measure different things, and mixing them up is one of the easiest ways to pick a loan that costs more than you expected.

The interest rate

The interest rate is what the lender charges you for borrowing the money itself, expressed as a yearly percentage of the balance you still owe. On a fixed-rate installment loan, interest is usually calculated each month on the remaining balance, so you pay more interest early on and less as the balance shrinks.

The APR

The APR starts with the interest rate and adds most of the required costs of getting the loan, such as an origination fee, then expresses the total as a yearly rate. Lenders in the US must disclose the APR under the Truth in Lending Act, and Canadian lenders must disclose a comparable annual cost of borrowing. Because it includes fees, the APR is the fairer number for comparing two offers side by side.

An example

Imagine two $10,000 loans over 36 months, both with a 14.99% interest rate. Loan A has no fees. Loan B charges a 5% origination fee ($500) that's taken out of the money you receive. Loan B's interest rate looks the same, but its APR is noticeably higher because you're paying $500 more to borrow the same amount — and you only receive $9,500.

What to check on any loan offer

• The APR, not just the interest rate.
• Whether the rate is fixed (stays the same) or variable (can change).
• Any origination, administration or prepayment fees.
• The total amount you'll repay over the life of the loan.

How this works at LoanEase

LoanEase charges no origination fee, so on our loans the APR and the interest rate are the same. Every offer shows the APR, monthly payment, total interest and the full payment schedule before you sign, and there's no penalty for paying early.