Despite what some well-meaning people may tell you, there really is a difference between an interest rate and APR (annual percentage rate). Understanding this difference is important, you don’t want to make any mistakes when calculating the cost of your loans.
The interest rate is essentially the cost of borrowing money for a particular length of time. It refers to fee that a lender charges you on the borrowed capital and is usually calculated as a fixed percentage of the principal amount. This rate is exclusive of any origination fees or other charges that the lender charges at the time of taking the loan.
APR also refers to the total cost of borrowing but the difference is it is expressed as an annual rate and takes into account all the charges and fees that the borrower pays at the time of taking out the loan, including origination, settlement, and closing fees if any.
APR is useful for making more accurate comparisons between different loans as the calculation is done while factoring in the total cost of borrowing. While interest rate helps you calculate how much you will pay on the money you borrow, it is not an effective tool for comparing different loans as it does not factor in the miscellaneous fees, which in fact add to the total cost of the loan.
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