What’s The Difference Between An Interest Rate And An APR?

The Difference Between An Interest Rate And An APR

What is an interest rate? What is an APR? What are their differences, and how do they affect you when you apply for loans for federal employees?  

Borrowing money is a complex matter that involves lots of jargon. You need to be able to understand the relevant terminology for you to find and choose the best loan for you and your family. Two terms you’ll often hear when you’re looking for loans for federal employees are “interest rate” and “APR.” Let us explain these two terms. 

Interest Rate?

Perhaps you are not familiar with interest rates. An interest rate is an amount you pay for borrowing money over a period of time. This is usually calculated based on the principal or the amount of money you borrow. For example, if you take out a loan for $5,000 with an interest rate of 23%, you will be paying a total of $1,150 per year, which would likely be divided into a monthly payment of $95.8. 

How are interest rates determined? 

Naturally, the economy is a major influence on interest rates. However, individual factors also affect the interest rate you may get when you apply for a loan. Banks also factor in your credit score, the down payment amount, the length of your loan, the loan amount, and the type of loan you’re applying for. 

It’s important to remember when you’re looking at loans for federal employees that the interest rate is not the full picture or the complete cost of your loan. This is where the APR comes into the picture.

Annual Percentage Rate (APR)?

Annual percentage rate or APR is a calculation of the total costs for borrowing money. The APR includes the interest rate, finance charges, document fee, processing fee, and all other fees the bank may require. The APR is often expressed in percentages. Continuing the example in interest rate. If you’re borrowing a $5,000 loan with fees amounting to $125, then this amount will be added to the loan amount, which will become $5,125. Your annual payment (based on a 23% interest rate) will then be based on this new amount, which will be $1,178.75. To get the APR, you need to divide the new annual payment by the original loan amount, which is 23.57%.

Interest Rate Versus APR: Which Should You Consider? 

While the annual percentage rate provides a more complete picture of how much your loan costs, you cannot completely ignore interest rates. In fact, you need both to get a better understanding of the true costs of your loan. Both the APR and the interest rate will tell you how much you’re paying for your loan and how much more you’re paying in fees. So, consider both when you deliberate loans for federal employees.

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