Why Your Loan APR Can Be Different Than the Interest Rate

Taking out a personal loan can be overwhelming, from looking at all the options available to submitting private details and being scrutinized, all while worrying about your credit score in the process. But it doesn’t have to be, when you understand how it works.

If you are looking at unsecured personal loans, the interest rate can be anywhere from 15% or more, depending on your credit score, amount and term requested, along with other factors. An interest rate is set by the lender with unsecured loans, and a percentage that would be applied each month to your outstanding balance. 

Personal Loan Interest

A lender will charge interest rates on a personal loan, which is the main cost of borrowing. The actual rate a lender might charge often varies depending on your credit history, the type of lender and the type of loan. The maximum interest rate a lender can charge in Canada is 60% annually, which would include all fees and costs. The average interest rate for an unsecured personal loan in Canada usually varies between 15% to 45%. The interest rate for an unsecured personal loan is usually a fixed rate, meaning your monthly payments would stay the same for the life of the loan until it’s paid off.

Personal Loan APR

An annualized percentage rate, or APR, is often confused with the interest rate. At first glance, they seem similar, but the APR is your true cost of borrowing and would be the interest rate along with any other costs, such as origination fees or administrative fees. If there are no additional fees the APR and the interest rate will be the same. Often a lender will charge an origination fee, which ranges from 2% to 10%, and these fees will not affect your interest rate, but they do impact the overall cost of the loan. So when the APR and interest rate do not match, you should investigate what the other fees might be so you understand what it might cost you and how it compares to other options. 

Comparing Interest and APR

If you were to take a personal loan of $5,000 which had an origination fee of 5%, this would be a charge of $250 by the lender. This amount comes off what you have requested, so if you were asking to borrow $5,000 and the loan had an origination fee of 5% you would find $4,750 deposited in your account if approved. So if you were borrowing for a specific purpose and knew the cost, you might receive less than you planned for and would want to consider this for the actual amount to borrow or you may find yourself short of what is needed. 

Applying for a Personal Loan

It should be clear that getting a loan without origination fees or other costs is best avoided, and that your APR and interest rate should be very close or the same. Which is easier if you have a good to excellent credit score as you will be able to qualify for better loans and terms. 

When applying for personal loans, you should only borrow as much as necessary, and try to choose shorter repayment terms. This can help keep the cost of borrowing down as loans with shorter terms mean you will have less interest to pay, and keep your monthly payments lower. 

It’s also advised to know your credit score beforehand, because if the need for the loan isn’t urgent and your credit score was near another band that could provide better borrowing opportunities, it can be worthwhile to improve your credit score first. For example, if you had a credit score of 685, by focusing on improving it to be over 700 you would likely find much better rates and could save a significant amount of money that would be paid towards interest. 

Learning how to calculate the interest rate on a loan can help with finding the better options available when comparing loans and is worth your time to understand how it works when you are looking to borrow online and find your best opportunities.

To learn more about what you should know when looking for a loan, consider reading the following articles for more insight about borrowing: 

1. Personal Loans – Short vs Long Terms
2. Loan Mistakes to Avoid When Borrowing
3. How You Can Get a Loan With Bad Credit
4. How Smart Borrowing Can Help You Save
5. Benefits Of Good Credit and Why it Matters
6. Why Your Loan Application Might Have Failed 
7. Tips to ManageYour Personal Loan Payments 
8. What to Know When Applying for Online Loans
9. Questions to Ask Before Taking a Personal Loan
10. What Credit Score Do You Need for an Online Loan 

Being prepared before applying by being familiar with how the process works and how interest is calculated will help you with finding a loan with better terms for your personal credit situation and help you to find your best options available to you.