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Understanding Interest Rates and APR: A Guide by O1ne Mortgage
At O1ne Mortgage, we prioritize educating our clients about consumer credit and finance. Understanding the difference between interest rates and annual percentage rates (APR) is crucial when shopping for the best mortgage or loan options. This guide will help you make informed decisions and find the most cost-effective borrowing solutions.
What Is Interest?
Interest is the cost a borrower pays to borrow money, typically expressed as a percentage of the loan amount. Whether you’re taking out a mortgage, auto loan, student loan, or using a credit card, you’ll pay interest on the balance until it’s fully repaid.
How Are Interest Charges Calculated?
Interest charges are calculated as a percentage of your loan amount. For example, if you borrow $30,000 to buy a car at an interest rate of 5% over 60 months, you would pay a total of $3,968 over the life of the loan. For credit cards, interest is charged based on your average daily balance and the daily interest rate, which is your card’s annual rate divided by 365.
What Is APR?
APR, or annual percentage rate, represents the true cost of borrowing money with an installment loan, such as a mortgage, student loan, auto loan, or personal loan. APR includes the loan’s interest rate plus any additional fees and costs, such as origination fees, closing costs, mortgage insurance, and mortgage points.
How Is APR Calculated?
APR is calculated by adding all fees associated with the loan to the interest. For example, a $10,000 personal loan with an interest rate of 13% and an origination fee of $400 repaid over three years has an APR of 15.77%. For credit cards and other revolving credit types, APR is the same as the loan’s interest rate and doesn’t include fees.
What’s the Difference Between Interest and APR?
While both interest rates and APR reflect the cost of borrowing, APR provides a more comprehensive view of what you’re paying. APR includes both the interest rate and any additional fees, making it a more accurate way to compare loans. For example, if two loans have the same interest rate but different APRs, the loan with the lower APR is often the better deal.
APR vs. Interest Rate
| APR | Interest Rate |
|---|---|
| The total cost to borrow money as a yearly percentage of the loan amount | The rate you pay a lender to borrow money as a percentage of the loan amount |
| Includes interest and all lender or broker fees, such as an origination fee | Doesn’t include fees |
| Can give you a more complete look at how much you’ll really pay to borrow | While a lower interest rate typically means a more affordable loan, look at APR for an apples-to-apples comparison when loan shopping |
Why Is APR Higher Than Interest?
APR is generally higher than interest because it takes into account not just the loan’s interest rate, but also any fees associated with the loan. In some cases, such as when a loan has no fees, APR may be equal to the interest rate.
The Bottom Line
Understanding the difference between interest and APR can help you evaluate the best loan for you. What lenders will charge you to borrow largely depends on your credit report and score. Before exploring loan options, check your credit score to understand where you stand.
At O1ne Mortgage, we are committed to helping you find the best mortgage solutions. For any mortgage service needs, call us at 213-732-3074. Our team of experts is ready to assist you in making the best financial decisions.
Take the first step towards your dream home with O1ne Mortgage. Contact us today!
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