What is the difference between an interest rate and an APR?

The distinction between an interest rate and an APR (Annual Percentage Rate) is crucial for understanding the true cost of borrowing. The interest rate represents the cost of borrowing expressed as a percentage of the principal amount. It reflects only the cost of borrowing that is related to the loan itself and does not take into account any additional costs or fees associated with the loan.

On the other hand, APR provides a broader perspective on the cost of borrowing by including not just the interest rate, but also any other fees or costs that may be required to secure the loan, such as origination fees, closing costs, and other associated expenses. This makes APR a more comprehensive measure of the total cost of borrowing, allowing consumers to better compare different loan offers.

Understanding this distinction is vital for consumers looking to make informed decisions about loans, as relying solely on the interest rate can lead to a misunderstanding of the overall financial obligation. By focusing on the total costs as represented by the APR, consumers can better evaluate which loan might be more beneficial for them in the long run.