Short answer: the interest rate is what the lender charges for the money you borrow. The APR (annual percentage rate) is the interest rate plus certain fees charged when the loan is made, such as an origination fee, shown as a yearly rate (CFPB). When a loan has fees, its APR is higher than its interest rate, so the APR is the better number for comparing offers.
The two numbers side by side
| Interest rate | APR | |
|---|---|---|
| What it measures | The cost of the money you borrow | The cost of the credit as a yearly rate, including certain fees |
| Includes an origination fee? | No | Yes, fees charged as a condition of the loan count as part of the finance charge |
| Used to work out | Your monthly payment | A like for like comparison between offers |
| Required on the loan disclosure? | Not always | Yes, for consumer loans covered by the Truth in Lending Act |
Federal rules (Regulation Z) define the finance charge as the cost of credit in dollars, including charges the lender imposes as a condition of the loan (12 CFR 1026.4), and say how the APR must be worked out from the amount and timing of what you receive and what you repay (12 CFR 1026.22).
Worked example: $3,000 over 24 months
Assumptions: $3,000 loan, 18% interest rate, 24 monthly payments, and a 5% origination fee ($150) taken out of the loan, so you receive $2,850.
| Item | Amount |
|---|---|
| Monthly payment (from the 18% interest rate) | $149.77 |
| Total of payments | $3,594.54 |
| Interest | $594.54 |
| Finance charge (interest plus the $150 fee) | $744.54 |
| Amount financed (cash you receive) | $2,850.00 |
| APR | about 23.4% |
The interest rate is 18%, but because you pay the same $149.77 a month while receiving only $2,850, the APR is about 23.4%. The monthly payment formula and a full payment schedule are in our monthly payment guide, and you can try other fees in the origination fee calculator.
Reading the Truth in Lending box
For a closed-end consumer loan, the lender's disclosure must show these terms (12 CFR 1026.18):
- Amount financed: the amount of credit provided to you or on your behalf.
- Finance charge: the dollar amount the credit will cost you.
- Annual percentage rate: the cost of your credit as a yearly rate.
- Total of payments: the amount you will have paid when you have made all scheduled payments.
A quick check: total of payments minus amount financed should equal the finance charge. In the example, $3,594.54 minus $2,850.00 is $744.54.
When the two numbers are the same
If a loan has no fees that count as finance charges, the APR and the interest rate are about the same. A big gap between them tells you the loan has meaningful upfront fees.
How to use this when you compare offers
- Compare APRs for the same loan amount and the same term.
- Then compare the total of payments, which shows the full dollar cost.
- Check how much cash you will actually receive after any fee.
- For what counts as a high APR, see what is a good APR for a personal loan.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.