The annual percentage rate, or APR, is one of the most important factors to consider when applying for a personal loan – or any type of loan – because it determines the total cost. This figure is expressed as a percentage. It varies widely depending on the lender you choose, your loan amount, credit score and income, among other things.
What is APR on a loan?
The APR is a percentage that represents the total amount of interest and fees you pay each year on each amount borrowed. This figure is used to compare the costs of borrowing from different financial products, including personal loans, car loans, mortgages and credit cards.
When you compare personal loan offers, the APR helps you determine how much the loan will cost you in total, in addition to the amount you pay each month.
How is the APR for a personal loan calculated?
To calculate the APR, lenders take the interest rate for a personal loan and add the financing costs, which include origination fees and any other administrative costs.
Fortunately, most lenders have already listed the APR on their sites. If you still want to analyze the numbers, you can do so by following a few steps.
- Add up the interest and costs of the loan.
- Divide that figure by your original loan amount or principal balance.
- Then divide the resulting figure by the number of days in the term of your loan.
- Multiply that number by 365.
- Finally, multiply that number by 100 to convert that number to a percentage.
You can also use a loan calculator to calculate this percentage if you want to keep the calculations simpler.
What is the difference between APR and interest on a personal loan?
Although APR and interest are sometimes used interchangeably, there is a difference between the two. The interest rate on a loan is the amount that lenders charge borrowers for borrowing money. This amount, expressed as a percentage, can be simple or amortized, and will be charged on top of the principal balance or requested amount.
The APR, on the other hand, is a combination of the interest rate, along with other fees, such as administrative, origination or application fees, charged by the lender for making the loan. That is why the APR is often higher than the interest rate.
If a lender doesn’t charge any additional fees, the APR is the same as the interest rate, but no-fee loans are extremely rare.
What is the average APR on a personal loan?
APRs can vary based on several factors, including loan amount, loan term, credit score, annual income, and debt-to-income ratio (DTI). APRs for personal loans can range from about 8 percent to 36 percent. According to a study by Bankrate, the average annual interest rate for a personal loan is 12.21 percent as of April 17, 2024.
What is a good APR on a personal loan?
A good APR on a personal loan is usually one under 12 percent. But to qualify, you need a credit score above 670 and a stable source of income or a creditworthy cosigner who meets these requirements.
Securing a low APR can save you thousands of dollars over the life of a loan, as shown in the table below.
| April | Monthly payment | Total price |
|---|---|---|
| 6% | $193.33 | $11,599.68 |
| 11% | $217.42 | $13,045.45 |
| 18% | $253.93 | $15,236.06 |
If you borrow $10,000 over five years, you will pay $1,446 less with a 6 percent APR than with an 11 percent APR. And if you have an APR of 18 percent, you’ll pay $2,191 more than with an APR of 11 percent.
How to get the lowest APR on your personal loan
When looking for a personal loan, you may notice that the APRs offered vary significantly by lender. That’s because lenders take other factors into account when determining your APR, such as the length of the repayment term, the loan amount and the purpose of the loan.
To increase your chances of qualifying for a low-interest loan, consider the following:
- Choose a shorter loan term. Lenders typically offer lower rates for shorter-term loans because they involve less risk.
- Opt for a smaller loan. Likewise, if you borrow less, you run less risk. A smaller loan can help you qualify for a lower APR.
- Borrowing with a purpose. It is not wise to go into debt for needs. A lender may impose a higher rate if you get a loan to pay for a vacation than if you get a debt consolidation loan or a home improvement loan.
- Choose a loan with few costs. Some lenders charge minimal fees, or none at all. If possible, look for a plan that keeps costs in check, plus offers rate discounts for things like signing up for automatic payments, to maximize your savings.
Additionally, you must have good to excellent credit, a low DTI ratio (36 percent or less) and a stable source of income to qualify for the lowest rates.
How to compare personal loan rates?
The APR can help you get an idea of what your loan will cost, but it’s just one of many factors to consider when comparing personal loan offers.
Loan terms
After reviewing the lenders’ APRs, consider the loan terms. The APR will likely differ based on the term. Compare terms to see which lender offers the better overall deal.
Additionally, the length of your repayment term affects the amount you pay each month. Longer terms lead to a lower monthly payment, but also to higher interest over the term of the loan.
Cost
Lenders may also charge costs in addition to interest. Origination fees typically range between 1 and 10 percent. They are common with online lenders. Also look for fees that can sneak up on you, such as late fees and prepayment penalties. These may not be included in the APR, but can affect your overall costs.
Eligibility
Keep in mind that lenders may have criteria that go beyond basic credit score and income requirements. Some lenders only serve customers in certain states, while others only offer personal loans to people looking to consolidate their debts.
Additional features
Finally, look for other features that can make your borrowing experience smoother. These include simple online applications, prequalification tools, a range of customer service hours, discounts and unemployment protection.
it comes down to
When it comes to any type of personal loan, the APR is one of the most important factors to consider because it will help you determine the total cost of the loan, in addition to how affordable it can be for you. Good credit, a low DTI ratio, and a stable source of income can all help you secure a low APR. But even if you have less than perfect credit, you can still secure an affordable loan by choosing a lender that specializes in fair or bad credit loans, or by applying with a cosigner.
