When you start researching student loans, you will come across several new terms. Sometimes it’ll feel like learning an entirely new dictionary. Each new term is vital to understand, however, since they will play a part in your finances. One such term that’s overlooked or misunderstood is APR—or Annual Percentage Rate.
Let’s take a look at what is student loan APR and why it is important.
What Is Student Loan APR?
APR is an abbreviation for Annual Percentage Rate. It refers to the percentage of interest you have to pay on a loan every year.
This is different from the interest rate. The interest rate refers to the amount that your lender is charging you to lend you the money. The interest rate doesn’t take into account any fees that the lender charges you. It is calculated purely on the amount that you borrow.
Interest Rate vs APR
APR is calculated differently. Student loan APR takes into account all fees and charges associated with your student loan. Because it is calculated based on the principle + the fees, the APR is usually higher than the interest rate for the same loan.
So what additional fees and charges are taken into consideration when calculating student loan APR? Different lenders may tack on different fees to your loan. One fee that almost all lenders charge is the loan origination fee. This is a fee that is charged for processing your loan application. Very few lenders process loan applications without charging an origination fee.
When your loan application is processed and sent to you to sign, the APR for the loan will be included in the offer letter. It’s crucial to check the APR for each loan before you sign the agreement.
Why Is APR Important?
There are several reasons why knowing the APR on your loan is essential. For one thing, it can save you a lot of money by making informed choices.
The origination fee and other charges added on to your loan vary considerably from one lender to another. Some lenders may offer low rates of interest but then make up for it by charging higher origination and other fees. This can increase the APR significantly. When comparing loan offers, it is more important to compare APR numbers instead of only comparing interest rates. The APR gives you a more realistic picture of the total cost of the loan.
When shopping for student loans, ask each lender about both—their interest rates and APR. This will help you make a better comparison of the cost of each loan.
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