How to compare APRs (and why the interest rate is not enough)

Interest rate vs. APR

The interest rate is the yearly price of borrowing the money you still owe. The APR, or annual percentage rate, starts with that rate and also folds in certain required fees, such as an origination fee, to express the total yearly cost of the loan as one percentage.

Because of that, APR is generally the better number for comparing offers. In the United States, lenders are generally required to disclose the APR and the total cost of credit before you commit, so you should be able to find it in the loan's disclosure documents.

A worked example

Suppose you borrow $10,000 for 36 months at a 12% APR with no fee. Your monthly payment would be about $332.14. Over the full term you would pay back about $11,957.15, which means about $1,957.15 of that is interest.

Now take the same loan, but the lender charges a 5% origination fee that is deducted from the money you receive. You still owe payments based on $10,000, so the monthly payment is the same $332.14. But you only receive $9,500, and the fee adds $500 on top of the interest. Your total cost of borrowing rises to about $2,457.15 on money you actually got to use, which works out to an APR of roughly 15.6% on the amount you received.

That gap is exactly why a lender advertising a 12% interest rate and a lender advertising a 12% APR are not offering the same deal. You can test your own numbers with our loan calculator.

Costs an APR may not capture

• Late payment fees and returned-payment fees.
• Prepayment penalties, which charge you for paying the loan off early. They are less common on personal loans, but check.
• Optional add-ons such as credit insurance or payment protection that you are offered at signing.
• Fees that only apply in certain situations, such as a payment-method fee.

How to compare offers fairly

1. Ask each lender for an offer on the same loan amount and the same term, so you are comparing like with like.
2. Write down the APR, the monthly payment, the total you would repay, and any fee that is deducted up front.
3. Notice whether the number you were quoted is a range. Advertised ranges describe the best and worst cases, and your own rate depends on the lender's review of your credit and income.
4. Read the fee section for late fees and prepayment terms.
5. Choose the offer with the lowest total cost that has a monthly payment you can comfortably afford.

Quick checklist

• Compare APR to APR, never interest rate to APR.
• Look at total repayment, not only the monthly payment. A longer term lowers the payment but usually raises the total interest.
• Check for an origination fee and how it is paid.
• Make sure the payment fits your budget with room to spare.