{"id":57038,"date":"2017-03-22T09:00:50","date_gmt":"2017-03-22T16:00:50","guid":{"rendered":"https:\/\/www.redfin.com\/blog\/?p=57038"},"modified":"2023-05-02T11:39:40","modified_gmt":"2023-05-02T18:39:40","slug":"interest-rate-and-apr-are-not-the-same-thing-heres-the-difference","status":"publish","type":"post","link":"https:\/\/www.redfin.com\/blog\/interest-rate-and-apr-are-not-the-same-thing-heres-the-difference\/","title":{"rendered":"The Difference Between Interest Rate and APR\u2014Nope, They’re Not the Same"},"content":{"rendered":"
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\"Interest
Image via iStock<\/figcaption><\/figure><\/figure>\n

Some people believe that a loan’s interest rate<\/span> and its annual percentage rate<\/span> (APR) are the same thing. They’re not.<\/p>\n

What is interest?<\/strong><\/h3>\n

Interest is the money a borrower pays to a lender for the privilege of borrowing money. If lenders did not charge interest, they would make no profit by lending money. Interest is the money a lender makes for the service of lending money.<\/p>\n

What is an interest rate?<\/strong><\/h3>\n

When a lender makes a loan, he charges interest that is equal to some percentage of the loan amount. This percentage is the mortgage interest rate<\/a>.<\/p>\n

What is an APR?<\/strong><\/h3>\n

APR stands for annual percentage rate. It equals the interest rate plus any fees and minus any rebates offered by the lender. Usually, these fees and rebates are settled up front. The APR takes those fees and rebates and spreads them out over the full life of the loan. The goal is to show borrowers the true lifetime cost of a loan, so that it can be more easily compared to other loans.<\/p>\n

For instance, let’s use an APR calculator<\/a> to compare two 30-year loans. They both have a 6% interest rate, but Loan A has $2000 in fees, and Loan B has $3000 in fees:<\/p>\n

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\n\n\n\n\n\n\n
Loan<\/td>\nInterest Rate<\/td>\nFees<\/td>\nAPR<\/td>\n<\/tr>\n<\/thead>\n
Loan A<\/td>\n6%<\/td>\n$2000<\/td>\n6.186%<\/td>\n<\/tr>\n
Loan B<\/td>\n6%<\/td>\n$3000<\/td>\n6.278%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n

Loan B has a higher lifetime cost than Loan A. That’s a simple example, since the loans have the same interest rate, and one loan has an obviously higher fee. But what if Loan A has a 5.7% interest rate with $2000 in fees, and Loan B has a 5.8% interest rate with $1200 in fees? Which is more expensive, overall?<\/p>\n

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\n\n\n\n\n\n\n
Loan<\/td>\nInterest Rate<\/td>\nFees<\/td>\nAPR<\/td>\n<\/tr>\n<\/thead>\n
Loan A<\/td>\n5.7%<\/td>\n$2000<\/td>\n5.882%<\/td>\n<\/tr>\n
Loan B<\/td>\n5.8%<\/td>\n$1200<\/td>\n5.910%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n

Now we can see that, again, Loan B has a higher lifetime cost, thanks to its higher APR.<\/p>\n

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