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Monday, October 2, 2023

Interest Rate and Annual Percentage Rate – Which Will Help You Settle Your Loans Better?

Do you find yourself struggling with calculating the overall amount for loan settlement?

The process is complex, but it makes your head dizzy with acronyms and percentages. Anyway, if you’re looking for a Debt Consolidation Loan or medical credit, you must have come across two criteria – interest rate and APR.

But only one of these will boost your efforts in helping you pay your loans.

What is the Difference Between APR and Interest Rate?

As per the Reserve Bank of Australia, there are about $145.5 billion in outstanding personal loans in Australia. Imagine the mismatch accident if you fail to factor in the critical numbers, such as the interest rates and APR.

But, how are these two different?

Interest Rates

Interest rates are the annual expenditure you incur to borrow a particular loan. The lending institutions decide the rate they charge you based on your credit score and repayment duration. Essentially, the length of debt settlement and the interest collectively determine your monthly payment on the mortgage.

For instance, the monthly payment for a mortgage of 5-year will always be higher than that of 10-years.

Annual Percentage Rate

Annual Percentage Rate includes the yearly cost of a loan with other charges. The extra expenses with APR will be mortgage insurance, loan origination fees, closing costs and discount points. So, the more the levies, the higher the overall credit structure.

To be precise,

Interest Rate = Annual Cost for you to get the loan

APR = Interest Rates + Other Charges

How Do Interest Rates and APR Affect Your Loan Repayment?

When it comes to picking a loan, it’s crucial to check both the interest rates and APR. Interest rates are merely the annual expenditure you need to pay to settle your loan. In comparison, APR fits the other pieces of costs to your loan, which need to be determined.

An APR gives you a clearer picture of the money you need to shell out for settling your loan.

You might assume that a higher APR will turn the credit expensive for you, but there’s a catch!

For Instance

Suppose two loans of $100,000 with one having higher interest rates and lower fees and the other with lower interest rates and higher fees. Let’s call the first Loan A and the second Loan B.

Assume Loan A has an interest rate of 3.00%, $5,000 fees and an APR of 3.40%. For Loan B, imagine the values at 3.40%, $2000 and 3.56%, respectively. So, for a 10-year repayment duration, you will receive higher concessions with Loan B despite a higher APR.

Loan A: $100,000 principal, 3.00% interest rate, $5000 fees and 3.40% APR. Loan B: $100,000 principal, 3.40% interest rate,  $2000 fees and 3.56% APR.
Time into Loan Total Expense [(interest+principal)*months]+ fees Total Expense [(interest+principal)*months]+ fees Difference
5 years ($421.5*60)+$5000 = $30290 ($443*60) + $2000 = $28580 $1710
10 years ($421.5*120) +$5000 = $55580 ($443*120)+ $2000 = $55160 $420

In A Nutshell

Looking for affordable credit is a time-consuming task. Whether you are borrowing a Debt Consolidation Loan or a house mortgage, the interest rates and APR play a significant role. That’s why you must gauge the overall effect of these two on your pocket during repayment.

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