APR vs Interest Rate: Which Impacts You More for Your Personal Loan

When applying for a Personal Loan, you may have heard terms like Interest Rate and APR (Annual Percentage Rate). While both affect your cost of borrowing, they differ in scope and significance. Knowing the difference is key to understanding your loan and avoiding hidden costs. Let's unravel what each term means and how it impacts your borrowing decision. Read on!

What is an Interest Rate?

An interest rate is the percentage charged or earned on a sum of money over time. When you borrow money, the interest rate determines how much extra you need to pay back to the lender.

For example, if you take a ₹1,00,000 loan at a 10% annual interest rate, you’ll owe ₹10,000 in interest after one year (excluding any payments made in between).

What is APR? 

APR (Annual Percentage Rate) is the total yearly cost of the borrowed amount, which is expressed as a percentage. It includes not just the interest rate but also the fees and other charges associated with the loan.

For example, if the loan has a 10% interest rate, but there are processing fees and other charges, the APR might be 11.5%. That means you are effectively paying 11.5% per year on the loan.

Interest Rate Vs APR

Let’s take a look at the difference between interest rate and APR:

How to Calculate the Interest Rate and APR on a Loan?

To calculate the interest rate, use this basic formula:

Simple Interest = (Principal × Rate × Time) / 100

However, many loans use compound interest, so actual computations might differ.

For APR, the calculation is a bit more involved, as it takes into account:

• Loan amount
• Interest rate
• Repayment tenure
• All associated fees

Lenders often use specialised software to calculate APR, but you can find online calculators that let you plug in the numbers to get an estimate.

Example: A ₹1,00,000 loan with a 10% interest rate and a ₹2,000 processing fee over one year may result in an APR closer to 11.9%. The difference grows with the size of the loan and the number of associated fees.

Why is APR Higher Than the Interest Rate?

APR is usually higher because it captures the entire cost of borrowing. Interest rates only account for the interest accrued, while APR bundles in upfront and recurring fees, ensuring there are no surprises down the line.

How Can I Get a Lower APR?

Getting a lower APR on your Personal Loan can save you a significant amount over time. Here are some smart strategies to help you get a better deal:

1. Improve Your Credit Score: Lenders offer the best APRs to those who have strong credit histories. So, pay your bills on time, reduce credit utilisation, and avoid opening too many new accounts at once.
2. Shop Around and Compare Offers: Don’t settle for the first loan offer you receive. Different lenders have different fee structures; look beyond just the interest rate and focus on the APR to identify the most cost-effective option.
3. Choose a Shorter Loan Term: While shorter loan tenures mean higher monthly payments, they usually come with lower APRs and less interest paid overall.
4. Negotiate with Lenders: Especially if you have a strong credit profile or an existing relationship with the bank, you can ask for reduced fees or interest rates to lower your APR.
5. Borrow Only What You Need: A smaller loan amount might qualify you for better terms, especially if it aligns with your debt-to-income ratio.

To Conclude 

Understanding the difference between an interest rate and an APR is important when you are evaluating Personal Loan offers. While the interest rate reflects the direct cost of borrowing, APR provides a more comprehensive picture by including fees and other charges. This broader perspective helps you make more informed decisions and avoid hidden costs. To secure a lower APR, improving your credit score, comparing multiple offers, negotiating terms, and being strategic about your loan tenure and amount can all work in your favour.

However, if you're looking for a transparent and competitive loan offer, Poonawalla Fincorp’s Personal Loan stands out with attractive interest rates, minimal processing fees, and quick approvals, ensuring you get both value and peace of mind. Apply today!

Frequently Asked Questions

1. What is a Good Interest Rate?

A good interest rate depends on the type of loan, your credit score, and current market conditions.

1. Why is APR Higher than Interest?

APR is higher than the interest rate because it includes not only the interest cost but also other fees such as loan processing charges, administrative fees, etc.

1. Which should I pay more attention to: APR or interest rate?

If you compare loan offers, APR is more useful because it reflects the total cost of borrowing. But if you're focused on monthly payments, the interest rate might be more relevant.