Understanding annual percentage rate (APR) is an important step toward making an informed comparison between different loans. We walk you through the basics of APR, throw in a few examples and tell you what you can realistically expect based on your credit history.
APR is your loan’s interest rate and financing fees expressed as a percentage. Since it’s written as a percentage, it’s easily confused with interest rates — it doesn’t help that when there are no fees, APR and interest are the same.
Most personal loan providers base your APR on the amount you borrow, the time you have to pay back your loan (known as the loan term), your financial history and any fees they charge.
What is an interest rate?
An interest rate is the percentage of your loan balance that you have to pay back in addition to the amount you borrowed. With personal loans, lenders often charge you interest with each scheduled repayment — which is usually once a month. Your monthly repayment actually has two parts: A repayment on your balance and an interest payment.
As your balance gets lower, the amount in interest decreases since it’s a percentage of that balance. Your payments on the balance, however, increase so you end up paying the same amount each month.
Why should I care about APR?
Comparing APRs on different loans with the same term is the easiest way to tell which is the least expensive loan. That’s because the interest rate alone doesn’t take into consideration how much fees impact your payments.
The most common fee associated with personal loans is an origination fee, which covers application costs. These tend to range from 1% to 6% of your loan amount and are subtracted from your funds before you receive them.
Let’s look at an example: Say you wanted to borrow $10,000 and repay it over five years. You applied with two lenders and this is what they offered:
First lender
Second lender
Interest rate
11%
9%
Origination fee
1% ($100)
6% ($600)
APR
11.43%
11.52%
Monthly repayment
$219.60
$220.04
The second lender looks like a better deal when you look at the interest rate alone. But when you factor in the fees charged, it’s clear the difference is not nearly as big — even more apparent when you look at the monthly repayment.
Compare rates from online personal loan lenders
Pro tip: Compare rates for loans with the same repayment term for the best results
Your loan term is an easy-to-forget factor that goes into determining your APR.
How does this work? Looking at the previous example. Say you wanted to borrow $10,000 from the first lender with the 11% interest rate but weren’t sure how much time you wanted to take to pay it back. Compare two different loan terms:
24-month term (2 years)
60-month term (5 years)
APR
12%
11.43%
Monthly repayment
$470.74
$219.60
Total interest paid
$1,197.74
$3,075.91
Total loan cost
$11,297.74
$13,175.91
Three things become clear when you look at this comparison:
A shorter loan term can increase your APR and your monthly repayments, but lower your overall loan cost.
Higher APRs for shorter-term loans aren’t necessarily more expensive — in fact, the opposite could be true. That’s why it’s more effective to compare loan APRs with similar terms.
The lowest APR for the same loan term is, in fact, the least expensive.
What’s a good rate on a personal loan?
Since the APR you’re offered is heavily dependent on your personal credit score, it’s hard to say what makes a good overall rate.
Personal loans come with APRs that range from 4% to 36%, though you can sometimes find an APR as low as 2%. The lowest rates are available for people with good or excellent credit, while higher rates tend to go to those with low credit or a poor credit history.
If you have a credit score of 800 or higher, you can expect a rate around 9%, though you might qualify for the lowest rates out there. If your credit score falls between 650 and 799, expect an APR around 12% to 20%.
Those with credit scores below 650 should be prepared to pay between 28% and 36% APR — if they can get approved at all.
Don’t be fooled by starting APRs: They’re only for people with perfect credit
We’ve all done this: Looked at the lowest possible rate on a loan and assumed it’s the rate we’d get. In reality, those low rates only apply to the small group of people who have absolutely perfect credit — the type of people who probably don’t even need loans.
To get a better idea of what you can expect with a lender, fill out a pre-approval application or use a calculator to get a personalized rate. Pre-approval typically doesn’t require a hard credit check, so your credit score shouldn’t be affected.
Keep in mind that your pre-approval rates might not be what you end up with — you’ll know your exact rate only after you fully apply. Think of pre-approval as a risk-free way of making a more informed decision.
Fixed vs. variable interest
When comparing interest rates, you might come across the terms fixed rate and variable rate.
Fixed interest rates stay the same throughout the entire term of your loan and don’t change.
Variable interest rates will fluctuate depending on the market.
Why would anyone get a variable rate loan? They tend to have a lower, more attractive, starting APR. It’s possible that they’ll stay at that low rate the whole time — but not likely.
It’s tempting to think that the APR covers your total loan cost, but usually there are some other fees that don’t factor in. These fees are not charged by ever lender and are circumstantial, so you won’t necessarily have to pay them. They sometimes include:
Late fees. Most lenders charge a fee for paying late.
Nonsufficient funds (NSF) or returned cheque fees. If you try to make a payment from an account without enough funds, many lenders charge a fee.
You might be able to save with autopay
Setting up automatic payments after taking out a loan has become pretty standard — and for good reason. Not only does it makes payment less of a hassle, but some lenders knock down your APR by a small portion — just for signing up for autopay.
Bottom line
Understanding personal loan APR is essential to making loan comparisons. Comparing APR is the simplest way to tell which loan — with the same terms — is the cheapest. Instead of going by the lowest advertised rates, try getting pre-approved with a few lenders to see what type of APR you can actually expect.
You can, however expect your interest rates to be on the higher end of the spectrum. Consider looking into taking steps to improve your credit score.
If you make all of your repayments on time, you can see your credit score rise from taking out a personal loan. However, you’ll damage your credit if you’re late, default or settle your loan through a debt relief company.
You can typically get a low interest rate on your personal loan if you have excellent credit, so taking steps to improve your credit score might be the most effective — but time consuming — way to get a good interest rate. If you don’t have the time for that, consider looking into a secured personal loan. Check out your other low-interest options in our guide here.
Yes, some lenders offer personal loans that can be used to purchase a car. However, you might want to consider taking out an auto loan instead: They’re usually easier to qualify for, your interest rate might be lower and you might not pay as many fees.
Anna Serio is a trusted loans expert who's published more than 800 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Fundera, Business.com, and ValueWalk feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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