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Understanding annual percentage rates on personal loans
Learn how APR works and what rates to expect on your personal loan.
An annual percentage (APR) is an expression of the cost of borrowing money. Comparing APRs is one of the quickest ways to figure out which personal loan costs less. But it’s not the only factor that affects cost — your loan term is equally important.
First, what’s an APR?
An annual percentage rate (APR) is the total cost of a personal loan. It’s the percentage of the loan balance that would pay in interest and fees over the course of a year.
It’s often confused with the interest rate, but they’re not quite the same. Interest doesn’t include origination fees or other financing that often come with a loan. Don’t have any fees on your loan? The 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.
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 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.
APR 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 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 APRs from top online personal loan providers
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How do I calculate APR?
Follow these steps to calculate APR on a loan:
- Add up the fees and interest you’d pay over the life of a loan.
- Divide the result by the loan amount.
- Multiply the result by 365.
- Divide the result by the number of days in the loan term.
- Multiply the result by 100.
APR calculation example
Sound complicated? Let’s take a look at an example. Say you had a $10,000 loan that charged $3,045.45 interest over a five-year term. Your lender also charged you a 5% origination fee, or $500. Here’s how you’d calculate your APR:
- Add up the fees and interest you’d pay over the life of a loan. $500 + $3,045.45 = $3,545.45
- Divide the result by the loan amount. $3545.45/$10,000 = 0.354545
- Multiply the result by 365. 0.354545 x 365 = 129.408925
- Divide the result by the number of days in the loan term. 129.408925/1825 = 0.070909
- Multiply the result by 100. 0.070909 x 100 = 7.0909% APR
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 our 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 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 so say what makes a good overall rate.
Personal loans come with APRs that range from 6% 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.
- Excellent credit. 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.
- Good credit. If your credit score falls between 740 and 799, expect an APR around 11%.
- Fair credit.Those with credit ranging from 580 to 669 might end up with an APR closer to 15%.
- Poor credit. Everyone else 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.
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 personalized 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 — usually $15 after 15 days.
- Nonsufficient 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 by .25% — and sometime as high as .50% 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
When the Federal Reserve increases or decreases the rates it charges banks, that affects what lenders will charge you. Typically, when the fed rate rises, so do personal loan APRs on new fixed-rate loans and all variable-rate loans. The same goes for when the fed rate decreases. You can learn more about how it works by reading our guide to fed rates.
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