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Understanding annual percentage rates on personal loans

Learn how APR works and what interest rate you could expect on your personal loan.

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.

First, what’s an annual percentage rate?

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 lenderSecond lender
Interest rate11%9%
Origination fee1% ($100)6% ($600)
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

1 - 7 of 7
Name Product Interest Rate Loan Amount Loan Term Requirements
Loans Canada Personal Loan
5.4% - 46.96%
$300 - $50,000
4 - 60 months
Requirements: min. credit score 300
SkyCap Financial Personal Loan
19.99% - 39.99%
$500 - $15,000
9 - 60 months
Requirements: min. income $1,666/month, full time employment/pension, min. credit score 575, no bankruptcy
Spring Financial Personal Loan
17.99% - 46.96%
$500 - $15,000
9 - 48 months
Requirements: min. income $1,800/month, 3+ months employed, min. credit score 500
goPeer Personal Loan
8.00% - 34.00%
$1,000 - $25,000
36 - 60 months
Requirements: recommended income $40,000/year, no payday loan debt, min. credit score 650, min. 5-year credit history. (Avg. approved rate of 15.80%)
LoanConnect Personal Loan
6.99% - 46.96%
$100 - $50,000
3 - 120 months
Requirements: min. credit score 300
Mogo Personal Loan
9.90% - 46.96%
$200 - $35,000
6 - 60 months
Requirements: min. income $13,000/year, min. credit score 500
Fairstone Secured Personal Loan
19.99% - 24.49%
$5,000 - $50,000
36 - 120 months
Requirements: must be a homeowner, min. credit score 560

Compare up to 4 providers

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)
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.

How do fixed- and variable-rate personal loans compare?

Fees APR doesn’t factor in

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:

  • Early repayment fees. Some lenders charge a fee or penalty for repaying your loan early. You could find lenders that don’t charge early repayment fees though.
  • 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.

Not sure where to start? Use our comparison tools to explore your personal loan options.

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