What's the Difference Between APR and Interest Rate on a Personal Loan?

There are many reasons why a personal loan is an attractive financing option for American consumers. So much so, that it’s the fastest growing consumer lending product in the US, particularly with younger generations.

One aspect that attracts a lot of consumers is that personal loans (for the most part) come with fixed interest rates. That means the interest applied to your repayment never changes, allowing you to make even monthly installments over the life of the loan. 

You may notice, however, when comparing personal loan offers that the rate is listed as a “fixed APR,” which stands for annual percentage rate. Is that the same as the interest rate? Kind of... but not quite. 

The distinction between the two is pretty simple, but it’s important to understand how interest rate and APR differ on a personal loan, compared to a credit card where they are virtually the same thing. 

With a personal loan, APR and interest rate are not a 1-for-1 comparison. That’s because the APR doesn’t only consider the interest rate, it also factors in associated loan costs (i.e., upfront charges like an origination fee). As a result, the APR is typically a slightly higher percentage number than the interest rate. 

However, the loan’s monthly payment is only impacted by the interest rate, not the upfront fees tacked onto the APR. For this reason, the best way to view APR is as a comparison tool for the “total cost of borrowing” on a personal loan. The lower the APR, the less you will be paying the lender on top of the principal amount owed.

Now that you know the difference between interest rate and APR, and how they work together, it’s important to obtain the lowest rates possible when shopping for a personal loan. While fees may range from lender to lender, an applicant can impact the APR they’re ultimately approved for by having strong credit (e.g., their history and credit score) and a low debt-to-income ratio.

For a consumer that doesn’t have the strongest credit, they can still obtain a personal loan, only with a higher APR and potentially a cap on the amount they can borrow. As such, it’s important to pay your bills in full and on time, maintain a low credit utilization ratio, and limit overall debt, as doing all of the above can boost your score to a more desirable range for lenders.

When looking at personal loan offers, comparing by APR is the best way to determine the total cost of the loan on top of the principal amount owed to the lender. With Fiona, users can compare APRs from multiple top providers, fast and easy, all in one convenient spot. 

When comparing personal loan offers, the APR is usually what sticks out the most. While some view APR as interest (like you would on a credit card), the percentage works a little differently with a personal loan. That’s because it considers all costs and fees associated with the loan, on top of the interest rate, for a better overall picture of your repayment.