Should someone look for a lower interest rate or lower APR?

When someone shops around for a loan, they’ll notice that lenders advertise both interest rates and APRs. Contrary to popular belief, these two figures are not the same thing. So, what’s the difference between APR and interest rate, and are people better off with a lower interest rate or lower APR? Keep reading to find out.

What is APR?

APR stands for annual percentage rate and represents the total yearly cost of a loan. It includes interest and any other fees that a lender may charge. Since APR is broader, it can give someone a more realistic idea of what a certain loan will cost them. If they’re unsure of what’s included in an APR, they shouldn’t hesitate to ask their lender. It’s important to remember that APR is not limited to the monthly payment, like the interest rate.

What is an interest rate?

Unlike APRs, interest rates play a role in a borrower’s monthly payment. Their interest rate is usually based on factors like their credit score, debt-to-income ratio, and market rates. Generally, the higher their credit score, the lower their interest rate and monthly payments will be.

APR vs. interest rate

When loan options are compared, it’s important to consider both APRs and interest rates, which are both expressed in percentages. Keep in mind that since interest rates are lower than APRs, many lenders advertise them instead. However, knowing APRs is vital as they’ll give borrowers a clear picture of the overall costs of certain loans.

Even though interest rates don’t include fees and other one-time costs, people can use them to calculate monthly payments. On the other hand, APRs are made up of most fees and one-time charges, so they may help them determine yearly costs and overall borrowing costs.

Remember that lenders are legally required to disclose both interest rates and APRs per the Truth in Lending Act. Also, the figures a borrower receives will vary based on their creditworthiness, so don’t be surprised if someone they know gets a higher or lower interest rate or APR from the same lender.

How to get a lower interest rate and APR

If borrowers have trouble qualifying for a low-interest rate and APR, they shouldn’t worry. There are ways they may be able to lock in the rates they want. First and foremost, it’s best to improve their credit. They should also pay their bills on time, reduce their debt, and don’t apply for too many loans and credit cards at once. If they can’t wait for a loan, they may want to apply with a cosigner or choose a secured option that involves collateral, like their house or car.

The bottom line

If monthly payments are a priority, borrowers will want to focus on lower interest rates. On the flip side, if their top concern is the overall loan cost of the loan, lower APRs may be more important to them.

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