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APR vs Interest Rate: The Ultimate Guide to Loan

APR vs Interest Rate: The Ultimate Guide to Loan

What factors should you consider when evaluating loan costs, particularly with instant loan apps? Two key metrics that often come into play are the Annual Percentage Rate (APR) and the loan interest rate. While both are used to calculate the cost of borrowing, they are not the same thing. In this guide, we’ll break down the differences between APR and interest rate, and explain how you can use them to make better comparisons when considering instant loan apps.

What is the Interest Rate?

The interest rate is the percentage of the loan amount that the loan provider charges you for borrowing money. It is expressed as a yearly rate, though it can be calculated for different periods such as monthly or daily. The interest rate only includes the cost of borrowing the principal amount.

Types of Interest Rates

1. Fixed Interest Rate:

  • Remains constant throughout the loan term.
  • Predictable monthly payments.

2. Variable Interest Rate:

  • Can change over time based on market conditions.
  • Monthly payments can fluctuate.

What is APR?

The APR, or Annual Percentage Rate, includes the interest rate plus any additional costs or fees associated with the loan. These costs can include origination fees, closing costs, and other charges. The APR provides a more comprehensive picture of the total cost of borrowing because it includes these additional expenses.

Components of APR

  • Interest Rate: The base cost of borrowing the loan amount.
  • Fees: Loan origination fees, application fees, and other lender charges.
  • Points: Upfront fees paid to lower the interest rate (applicable in mortgages).
  • Insurance: Mortgage insurance premiums or other required insurance.

Why the Difference Matters?

Understanding the difference between APR and interest rate is essential because it affects how much you’ll pay over the life of the loan. The interest rate tells you about the cost of borrowing the principal amount, but the APR gives you the complete picture by including fees and other costs.

Example:

Consider two loans:

Loan A:

  • Interest Rate: 5%
  • Fees: ₹500
  • APR: 5.5%

Loan B:

  • Interest Rate: 5.25%
  • Fees: ₹0
  • APR: 5.25%

At first glance, Loan A seems cheaper because of the lower interest rate. However, when you consider the APR, Loan B is actually more affordable because it has no additional fees.

How to Use APR and Interest Rate for Loan Comparison?

When comparing loans, it’s crucial to look at both the interest rate and the APR. Here’s how:

1. Compare Interest Rates for Base Cost:

Look at the interest rate to understand the base cost of borrowing the principal.

2. Compare APRs for Total Cost:

Compare the APRs to see the total cost of the loan, including fees and other charges.

3. Consider Loan Terms:

The length of the loan term can also affect the total cost. A longer loan term may have a lower monthly payment but higher total interest paid over time.

4. Check for Variable Rates:

If you’re considering a loan with a variable interest rate, be aware that the rate and your payments can change over time.

APR vs. Interest Rate

Feature Interest Rate APR
Definition Cost of borrowing the principal Total cost of the loan(includes fees)
Components  Principal  Principal + fees, points, insurance
Fixed or Variable Both Both
Transparency Partial cost Full cost
Comparison use Base cost of borrowing Total cost of borrowing
Impact of Fees Not included Included

FlexPay: Your Trusted Borrowing Solution

FlexPay is a loan product offered by Vivifi India Finance Private Limited. Since 2017, Vivifi has been supporting Indians through financial challenges with FlexPay, a line of credit specifically for salaried professionals. Our digital platform provides an instant credit line up to Rs. 3,00,000, featuring flexible repayment options.

Why Choose Us?

We provide a secure and dependable platform for borrowers. Here’s why you should choose us:

  • NBFC Certification: As a certified Non-Banking Financial Company (NBFC), we uphold stringent regulatory requirements.
  • Advanced Security: We utilize high-level encryption to safeguard your personal and financial information.
  • Transparent Terms: We offer clear and straightforward terms and conditions, including interest rates and fees.
  • Customer-focused: We prioritize customer satisfaction with responsive and dedicated support.

Consider our line of credit, where we don’t charge hidden extra fees. You only pay for the amount you use, making it a transparent and cost-effective borrowing option. With us, you have flexibility and control over your finances, ensuring you get the best value for your money.

Bottom Line:

We prioritize transparency by clearly presenting both the loan interest rate and the APR for our product. The interest rate signifies the fundamental cost of borrowing, while the APR incorporates additional fees, providing a comprehensive view of the total loan cost. This transparency enables you to make informed borrowing decisions, ensuring that with instant loan app like ours you have full awareness of your expenses and can borrow with confidence and assurance.