Two percentages you should be familiar with are the interest rate on the loan and the annual percentage rate (APR). The standard interest rate is the percentage the lender uses to calculate the monthly payments you owe to the lender. Again, these payments consist of a portion of principal, which reduces the balance you owe on the loan, and a portion of interest, which is the amount the lender collects for lending you the money.
The annual percentage of rate (APR), on the other hand, describes the annual cost of credit to you. In loan situations, where you have up-front costs associated with establishing the loans (closing costs), the APR is the percentage that takes the interest rate and the up-front costs into consideration. This means that the APR is higher than the interest rate.
Having two percentages or rates often confuses the consumer who is comparing their loan, mortgage or credit card options. When shopping and comparing two of the same type of loans against one another, it is important to compare the APR because this is the rate that takes the total costs into consideration. Even in a situation where the interest rate percentage is lower on one loan, if the APR is higher, then the loan with the lower APR is offering you the better deal. If you are simply calculating your monthly payments, however it is the interest rate percentage that you should use to calculate the payment.
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