APR VS Interest Rate: Know The Difference

When you’re searching for your business’s next credit card—or looking for loans—you’ll often come across the terms APR and interest rate. These pesky concepts represent extra money you’ll have to repay on top of your initial loan amount, but are necessary pieces in the world of lending.

While APR and interest rates share similar roles and can sometimes be used interchangeably, they ultimately mean different things. Understanding these differences will help you make informed decisions and can save you money the next time you take out a loan.

So what is the difference between APR and interest rate? Read on! We’ll break it down below.

What Does Interest Rate Mean?

The interest rate on a loan is effectively a way for lenders to make money when you borrow.

In most cases, when you borrow money and take time to pay off what you borrowed, your lender will charge you an extra amount. This extra amount is called interest. In other words, the interest rate is a percentage charged by your lender that you must pay in addition to the lump sum of money you have borrowed.

Depending on the type of loan you take out, you may pay a fixed or variable interest rate. Fixed rates stay the same for the life of the loan. Variable rates, on the other hand, can change based on the market rate. Most lenders will calculate a variable rate based on the prime rate, a metric published by the Wall Street Journal. If your interest rate goes up, then you’ll wind up paying more interest charges.

In many cases, your credit history will affect your rate. As such, you’ll want to aim to have a high credit score.

What Does APR Mean?

APR stands for Annual Percentage Rate. It incorporates a loan’s interest rate as well as various other charges, like points and fees. Broken down, the APR represents the total cost of borrowing on an annual basis. You’ll frequently see APR mentioned in relation to credit cards, although it still comes into play with traditional loans.

As an example, if you have a four-year loan with an interest rate of 15% and an origination fee of 4%, your APR will be 17.26%. This rate is higher because it accounts for the extra cost of the origination fee. Because it’s inclusive of all fees, the APR provides the true cost of borrowing annually.

With credit cards, the APR is affected by the prime rate as published by The Wall Street Journal. It is usually 3% higher than the federal funds rate, set by the Federal Reserve. In most cases, card issuers will determine a card’s APR based on the prime rate, plus a variable percentage rate calculated on your creditworthiness. Credit card APRs typically range from about 10% to 25%.

To get the lowest APR possible, you’ll want to have a solid credit history. If you struggle with a low score, there are numerous cards that can help boost your credit.

The Difference Between APR & Interest Rate

When it comes to credit cards, there is essentially no difference between APR and interest rate. Credit card issuers are required to state a card’s interest rate as APR (according to the Truth in Lending Act, a federal law enacted in 1968). This makes it easier for consumers to accurately estimate the credit card interest they might owe because APR shows the actual annual rate, whereas an interest rate alone does not account for additional upfront charges.

Note that even though issuers state APR, credit cards may carry extra fees that aren’t included in the official APR. You can often expect fees such as an annual fee, a balance transfer fee, a cash advance fee, and/or a foreign transaction fee.

Depending on the card you choose, however, you may manage to bypass one extraneous fee or more. For instance, many of the best travel cards forgo foreign transaction fees, while numerous other cards feature no annual fees.

When looking at more traditional business loans, however, the APR and interest rate will tell different tales. The interest rate is simply the amount of interest you’ll owe every period. The APR, meanwhile, is inclusive of the interest rate and other fees. These fees could include origination fees, closing costs, maintenance fees, or others.

You’ll want to keep this in mind because lenders aren’t required to advertise APRs upfront. Of course, most decent companies clearly and easily share their APR, interest rates, and other fees so you’ll have the full picture before borrowing.

APR & Credit Cards

You’ll want to consider APR carefully if you don’t intend to fully pay off your monthly credit card balance. This could be because you’ve made a large purchase or many purchases you can’t immediately pay off in full.

You may also need to consider multiple APRs since most credit cards come bundled with a few different rates. The most publicized APR (and the one that affects most people) is the card’s purchase APR. On top of this, there are usually additional APRs for balance transfers and cash advances. You may also see a penalty APR if you fail to make your payments on time.

However, by completely paying off your credit card balance every month, you probably won’t need to bother about APR. This is because most credit cards provide a sizable grace period between purchase date and payment due date. During this grace period, APR isn’t applied to your balance.

Oh, and don’t worry about timely payments negatively affecting your credit score — that is an urban legend. You’ll still be able to take advantage of the credit-building bonuses that come with having a credit card. In fact, paying off your monthly bills is one of the best things you can do to increase that all-important credit score.

Some cards also offer 0% introductory APR for a set number of months after you open your account. This means it might be beneficial to apply for such a card if you’re planning to make a large purchase that you won’t be able to pay off right away.

How To Find A Credit Card’s APR

By United States law, card issuers are required to easily and legibly share important details about the cards they offer. Most details you’ll ever need can be found in a card’s Schumer box, a legally-mandated text document named after U.S. congressman Charles Schumer, who paved the way for the box’s legislation. You’ll usually be able to find all of a card’s APR’s at the top of its Schumer box under a section titled “Interest Rates and Interest Charges”.

If you’re reading about credit cards on Merchant Maverick, we’ve made it quick and easy to spot a card’s APR. In every card info box, we’ve placed the APR under the annual fee on the right side. You can also see if a card has an introductory rate for both purchases and balance transfers by clicking “More card details” beneath the box.

APR & Interest Rate For Business Loans

While a credit card’s APR and interest rate are one and the same, APR and interest rates are more complex in the context of business loans.

As mentioned above, the APR communicates the total cost of a loan over the period of one year. It accounts for the interest rate plus other fees and costs, including origination fees, closing costs, and maintenance fees. In some cases, you may see these fees called “points”.

This means that a loan’s interest rate alone doesn’t tell the full story. You’ll want to double-check to find out if there are additional charges you might have to pay alongside the interest rate. Luckily, most decent lenders will state their APR upfront, meaning you won’t have to do the legwork yourself.

Want to get into the nitty-gritty of APR? Read up on the subject with our Beginner’s Guide to APR.

How To Calculate APR

Need to calculate APR on a loan? Determine it below with our handy calculator:

Want to calculate something else, like estimated APR or payments on cash advances or short-term business loans? Check out the rest of our small business calculators.

Final Thoughts

APR is an important tool, whether you’re looking at credit cards or business loans. While it shouldn’t be the only factor you consider, understanding how APR works can help you make informed decisions and potentially save you money. Knowing the difference (or lack of difference when it comes to credit cards) between APR and interest rate is also key, especially when you’re trying to get a holistic view of a potential loan or credit card.

Now that you have a grasp on the essentials, take a peek at the best low-interest small business loans. Or you can keep learning by perusing our guide to variable APR. New to business credit cards? Check out the basic dos and don’ts of business credit cards.

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