Whether you are in the market for a loan or repaying a credit card, you will come across the terms APR and Interest Rate. Don’t know the difference? You’re not alone. But rather than shy aware from asking, we want to empower you with the in’s and out’s of these pesky terms. What’s important to understand up front is that APR’s and Interest rates share similar roles and are sometimes used interchangeably, but have important differences.
So what does ‘interest rate’ mean?
When you take out a loan, the lender needs to make money. Interest is how they do this. So when you lend money, you will need to pay it off over a certain period of time. The lender will charge you an additional amount over above the lump sum you have borrowed. This is the interest rate. The rate can be fixed – so unchanging over the loan period. Or it can be variable – and fluctuate according to particular external variables. If your interest rate goes up, you are liable to pay back more on your loan. Your interest rate may also be linked to your credit score, which you will want to keep in good standing to keep that interest rate as low as possible.
What is an ‘APR’?
This is an acronym for Annual Percentage Rate. It is calculated according to the sum total of interest payable together with other fees and points owing. This results in a global figure that shows you the total cost of payment per year. It is often shown in relation to credit cards but can also be important for normal loans too. An APR gives you the true cost of the loan at large.
What is the difference between an APR and an Interest Rate?
When it comes to credit cards, there is no real difference. By law, credit card companies have to state their APR upfront. Traditional Lenders are not held to the same standards though. Making APRs and Interest rates more complicated when it comes to loans. Often there are hidden fees that are payable over and above what’s given. Usually, the ‘upstanding’ lenders will offer this information up front though, so that way the client understands the full picture before signing on the dotted line.
What is the ‘factor rate’?
Just in case you weren’t confused enough, an interest rate and APR shouldn’t be confused with a factor rate. Factor rates are expressed as percentages and show you how much you will be paying back. In the case of Merchant Cash Advance, this is determined once and upfront based on the total loan amount. Because of this, it can work out a bit pricier than loans, which work on monthly interest rates. So with the latter, the total amount owing will decrease as the loan is paid off. That said there are pros and cons to both. And it is worth researching the right loan for you.
The Bottom Line
Understanding the differences and similarities between APRs and Interest Rates is very important when it comes to deciding when and how to borrow. APR and interest rates are very similar so ensure you ask all the necessary questions and understand the full picture. As a client, this is both your right and your responsibility.
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