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Your annual percentage rate, or APR, tells you how much your loan costs per year. It offers a quick way to compare the cost of a loan from different providers. But while APR is one of the most important factors to consider before choosing a lender, it's not the only one.
An APR is the percentage of your loan balance that you pay in interest and fees over the course of a year. An APR only includes fees you're required to pay if you take out a loan.
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 either added to or subtracted from your funds before you receive them. If you take out a line of credit, your APR might also include annual fees.
Your APR doesn't include every possible fee that you could pay if you take out a loan. Late fees, prepayment penalties and nonsufficient funds (NSF) fees are all counted separate from the APR.
While your APR tells you the total cost of a loan over one year, interest tells you what percentage of your loan balance you'll pay over one year in interest. Interest is a specific type of cost that increases over time, and doesn't include fees.
If you take out a loan with no application or origination fee, your APR and interest rate are the same. That's why lenders sometimes use the terms interchangeably.
Some lenders only display the interest rate before you apply to avoid disclosing the true cost of the loan. If you can't find the APR, ask for an example before you apply. All lenders are required to disclose a loan's APR before you sign off on a loan, according to the Truth-in-Lending Act.
Say you wanted to borrow $10,000 and repay it over five years. You applied with two lenders and this is what they offered:
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.
These tips can help you make a more accurate comparison.
Follow these steps to calculate APR on a loan:
Sound complicated? Let’s take a look at an example. Say you had a $10,000 loan that charged $3,045.45 in 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:
Any rate below 12% is often considered a good rate on a personal loan. The average APR on a personal loan from a bank is around 9.65%, according to the federal reserve. But you can expect to pay anywhere from 6% to 36% APR.
Read our guide to personal loan rates for more information on what to expect.
Almost all personal loans come with fixed APRs, which stay the same. But student loans and some car loans come with variable rates. These rates increase and decrease depending on the lending market.
If interest rates are low, a variable rate could offer you a better deal for a loan with a term of a year or two. But since the market is hard to predict more than a couple years out, a fixed-rate loan is often a safer choice.
How do fixed- and variable-rate personal loans compare?
The APR is only one way to compare lenders. Consider these other factors before you submit an application.
Understanding personal loan APR is essential to making a strong comparison. Comparing APRs 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.
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