APR vs Interest Rate
On it’s own, interest rate seems nearly self-explanatory and the definition makes sense to most prospective homeowners. APR, however, often requires more explanation.
Interest Rate
Interest rate refers to the rate at which a borrower pays back interest on a loan that they take from a bank or other lender. Broken down, the interest rate is the percentage of the principal loan amount the borrower pays back during a certain period of time, and a year is the most common time frame to use as a metric. The lender predetermines the interest rate and the time frame for repayment of principal and interest.
Annual Percentage Rate (APR)
The most basic explanation of APR that it bundles all the fees associated with your loan together with your actual interest rate, and “annualizes” that into one all-inclusive rate. In other words, the APR is a finance charge formulated as an annual rate of interest on repayment of loan. As if things weren’t confusing enough between interest and APR, the APR also adds in the nominal APR, which is the simple interest rate over the course of a year while the effective APR includes any fees agreed upon plus the compound interest rate over a year.
Quite simply, the APR gives a more comprehensive perspective of what the loan costs the borrower over the life of the loan.
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