You must have encountered these terms whenever you apply for a loan or a credit card. If you are versed with these terms then reading the agreements and other documentation that you sign when accepting a loan offer doesn’t seem like a task but if you are in the other camp who questions why they didn’t teach you these things in school, then it seems you are being taken advantage of. For people in the second camp, these small explanations might be helpful.
Interest rate is simply the rate of interest that the lender charges you on your loan balance. This is the number by which your monthly payment is calculated.
APR on the other hand is the real interest rate you pay. This takes into account any fees or other costs that you pay along with the interest and then gives you actual rate that you pay on the loan.
For example, let’s say you got a $45,000 loan at 7% interest for 60 months. The monthly payment you would owe would be around $891.05. But let’s say we add a 6% origination fee on the loan. That’s $2,700. That means you would only receive $42,300. So, if were to calculate the rate of interest based on a loan of $42,300, monthly payment of $891.05 and term of 60 months, then you actually pay 9.63%. This 9.63% is the APR.