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Personal Loans 101: The Difference Between Interest Rate and APR

Loans are pretty complicated, especially for those taking out a personal loan for the first time. This is because you need to consider many terms and factors before you sign a loan agreement and start counting your cash.


You should consider two factors when getting a personal loan: the annual percentage rate (APR) and the interest rate. In that regard, it is safe to say that these two factors don't have the same role in personal loans.


Seeing that there are a bunch of complexities when getting personal loans, it's only right that you speak to a financial company. This way, you'll get to understand the intricacies of personal loans, guide you through your application, and help you get the best personal loan package for you.


If you're thinking of getting a personal loan, it pays to know the difference between interest rate and APR. With that being said, here's what you need to know about two — let's get to it!


The Difference Between Interest Rate and APR


Simply put, the interest rate is the cost of borrowing a sum of money. This is a lender's way of charging you with what you're borrowing until you can pay them back in full. Whatever the type of loan you get, you'll find that they'll have varying interest rates, which could also depend on your current financial health, income, and credit score.


On the other hand, the annual percentage rate or APR includes the fees and points that are included in your loan in addition to the interest rate you're paying. These fees can consist of the "origination fee" that could range from one percent to eight percent. If you agree to pay these points upfront, your lender can lower your rate.


Payments for Interest Rate and APR


Interest rates and APR are the same in some loans, meaning they don't differ in costs. However, it's still important to read the fine print to ensure you know exactly (and how much) you are paying for.


For example, if you take a $10,000 personal loan and plan to pay it back in five years, you can be given a 5% interest rate and pay no further fees. With that, the lender combined the interest rate and APR, giving you an $11,322.74 total for repayment.


Say you were offered a $10,000 loan with a low interest rate of 4.5 percent including a $200 financing fee, are you getting a better deal? The truth is, your APR is actually much higher at 5.31 percent, costing you about $11,409.53 in the total payment. If you pay the upfront fee, you'll end up paying $11,385.81, which is still much higher than the previous 5 percent interest rate and APR we mentioned earlier.


With that being said, you must speak to your lender about your loan's APR before signing the agreement. It also helps compute the loan with the interest rate and APR, compare your options, and see which is more ideal for you.


The Bottom Line: Working With the Right Financial Company Can Help Simplify the Complexities of Loans


Loans are truly complicated; that's why it's crucial to do a bit of research before you sign the deal. Knowing the difference between APR and interest rate can help you save load in your payments, allowing you to better manage your finances.


With that being said, it's only right that you work with a financial company that can help you choose the best personal loan option for you. They'll consider your financial health, income, and ability to pay, allowing you to select a loan that best fits your lifestyle and budget.


How Can Bessemer Finance Company Help You?


If you're looking for a finance company that offers fantastic deals when it comes to personal loans in Alabama, you've come to the right place.


Bessemer Finance Company is located in the heart of Bessemer and has been in the industry since 1964. For over a half-century, we've helped our local community reach its goals through financial guidance.


Learn more about how we can help you today!


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