Understanding annual percentage rates on personal loans

Learn how APR works and what rates to expect on your personal loan.

Updated

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 expressed as a percentage. Because 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 (or loan term), your financial history and any fees.

What's 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 — 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. 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 the loan processing fee (aka 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)
APR11.43%11.52%
Monthly payment$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 origination fee, it’s clear the difference is not nearly as big — even more apparent when you look at the monthly payment.

Compare rates from top online personal loan providers

Data indicated here is updated regularly
Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Monthly Service Fee Establishment Fee
Harmoney Unsecured Personal Loan
6.99% - 29.99%
$2,000
$50,000
36 to 60 months
N/A
$200-$450 depending on loan size
Apply for an unsecured personal loan up to $50,000 with no early repayment fees. Eligibility: Be a NZ resident/citizen and have a good credit score.
Nectar Personal Loan
8.95% - 29.95%
$1,000
$20,000
6 months to 4 years
N/A
$240
Unsecured loans from $1,000 with payouts made within one day of approval. Applications entirely online. Eligibility: Must be 18+, an NZ citizen or permanent resident, and have an income of $350 per week or more (after tax).
Lending Crowd Personal Loan
6.49%-16.78%
$2,000
$200,000
3 or 5 years
N/A
$250-$1,450 depending on the amount borrowed
A secured personal loan from $2,000 to $200,000 with repayment instalment options. Eligibility: Be an 18+ NZ permanent resident, earn $30,000 or more, have a good credit history and collateral/security.
QuickLoans Personal Loan
9.95% - 23.95%
$1,000
$20,000
6 to 60 months
$12
$95-$595 depending on loan size
Borrow up to $20,000 and apply online within 5 minutes. Eligibility: Be over 18, hold permanent NZ residency, have collateral/security, earn at least $450 per week.
Admiral Finance Secured Personal Loan
13.95% - 23.95%
$1,000
$50,000
6 to 60 months
N/A
$125-$595 depending on loan size
A secured loan from $1,000 to $50,000 with a quick online application process. Eligibility: Be an 18+ permanent NZ resident, have collateral/security, earn at least $450 per week.
NZCU South Personal Loan (Unsecured)
10.90% – 28.90%
$2,000
$20,000
Up to 7 years
N/A
$250
An unsecured personal loan up to $20,000 with personalised repayment options. Eligibility: Be an 18+ permanent NZ resident or non-resident on a working visa, earn $500+ weekly.
NZCU South Personal Loan (Secured)
9.90% - 28.90%
$2,000
$35,000
Up to 7 years
N/A
$250
A secured personal loan up to $20,000 with personalised repayment options. Eligibility: Be an 18+ permanent NZ resident or non-resident on a working visa, earn $500+ weekly.
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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)
APR12%11.43%
Monthly payment$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, up your monthly payments, 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 APR is heavily dependent on your personal credit score, it’s hard to say what makes a good overall rate.

Unsecured personal loans come with APRs that range from 5% 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 poor credit history.

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.

To get a better idea of what you can expect with a lender, fill out a prequalification application or use a calculator to get a personalised rate. Prequalification typically doesn’t require a hard credit check, so your credit score shouldn’t be affected.

Keep in mind that your prequalification rates might not be what you end up with — you’ll know your exact rate only after you fully apply. Think of it as a risk-free way of making a more informed decision.

Fixed vs. variable interest

When looking at different lenders, you might come across the terms “fixed-rate” and “variable-rate” interest. Fixed-rate interest doesn’t change throughout your loan term, but a variable rate loan might as the market fluctuates.

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 APR covers your total loan cost, but technically there are some other fees that don’t factor in. These fees are circumstantial, so you won’t necessarily have to pay them. They include:

  • Prepayment fees. Some lenders charge a fee or penalty for repaying your loan early. You could find lenders that don’t charge prepayment fees though.
  • Late fees. Most lenders charge a fee for paying late.
  • Non-sufficient funds or returned check fees. If you try to make a payment from an account without enough funds, many lenders charge a fee (usually the same amount as the late 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, some lenders knock down your APR for signing up.

Bottom line

Understanding personal loan APR is essential to making a strong comparison. Comparing APR is the simplest way to tell which loan — with the same terms — is cheapest. Instead of going by the lowest advertised rates, try getting prequalified with a few lenders to see what type of APR you can expect.

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

Frequently asked questions

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