Rate vs. APR

Difference Between Rate and Apr

Loans are an unavoidable part of our routine life as we all tend to take loans for different reasons like our houses, cars etc. Rate and Annual Percentage Rate (APR) are very important in determining the terms and conditions of your loan. They determine the monthly payments, which you have to pay against the loan you have taken.

When we are taking loans, we are in fact borrowing money from the lender.  Rate is the fee that we have to pay the lender for borrowing money. It is the interest rate or mortgage rate, but is termed as rate. Let us suppose we are buying a car that we cannot afford without taking a loan So we have to pay rate for the convenience we had by getting the loan. It is usually a round figure like in case a loan of $ 100,000 and rate of 5%, the payment will be $ 5,000. It is just the interest rate on the amount of your loan.

When you take loan, you will not only interest rate but there will be other fees like upfront fees, insurance fees as well. These charges and your actual rate are the Annual Percentage Rate, which is the money you have to payback to your lender. As there are no rules for APR calculation; each lender calculates APR in his own way. Since it gives a clear of your loan, one can compare APRs offered by different lenders before making a choice which lets you get a loan in easy installments.

They give you an idea about the monthly interest that you have to pay. Rate is the monthly interest rate, in round figure, where as APR it includes many other fees as well. Calculation of APR is more complex as there are a lot more fees that are involved than the rate. APR is higher than Rate due to the other fees that are included. APR is total cost of the loan, whereas Rate is merely the percentage interest rate.

As there are no proper guidelines in law while calculating APR, it also provides an opportunity to the lender to deceive you, so you must always be on your guard and consider the APR of several lenders before making a choice.

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