What It Means
An interest rate is the price of borrowing money, stated as a yearly percentage. The Consumer Financial Protection Bureau (CFPB) keeps it separate from the annual percentage rate (APR): the interest rate leaves out the fees charged for a loan, and the APR adds fees such as origination chargesLoan origination feeA charge a lender makes for setting up a loan, usually a percentage of the amount borrowed, either paid up front or taken out of the money you receive. See more. That makes the APR the broader measure of what borrowing costs you.
Try It: Slide the Rate and Watch the Payment Move
Example loan to start. Move the rate and see the monthly payment and total interest change.
0.01A fixed rate, the rate divided by 12 each month, and no fees. Fees would show up in the APR.
How People Say It
- "What rate did they give you on the car loan?"
- "We locked in the rate last week."
- "Rates went up, so our payment did too."
The Breakdown
Worked example. A $20,000 loan paid over 60 months at three different fixed rates:
| Rate | Monthly payment | Total interest |
|---|---|---|
| 5% | $377.42 | $2,645.48 |
| 7% | $396.02 | $3,761.44 |
| 9% | $415.17 | $4,910.03 |
What the result means. On this loan, each 2 points of rate adds about $19 to the monthly payment and between $1,100 and $1,150 to the total interest. A longer loan at the same rate lowers the payment but raises the total interest, because the balance is outstanding for more months.
Where the APR comes in. Suppose the same 7% loan carries a $400 fee taken out of the money you receive. You still repay $396.02 a month, but on $19,600 in hand, which works out to an APR of about 7.85% by Buhata's calculation. The rate stays at 7%, and the fee shows up only in the APR.
Good to Know
The CFPB advises comparing loans by APR, because lenders must disclose it and it reflects fees as well as interest. Compare APRs with APRs, never an APR with another lender's plain interest rate, since the two measure different things. Also check whether the rate is fixed or variable: the CFPB explains that a variable rateVariable interest rateAn interest rate that can rise or fall over the life of a loan or card because it's tied to an index, such as the prime rate, plus a set margin. See more is an index plus a margin, so it can change after you borrow.
FAQ
What's the difference between an interest rate and APR?
The interest rate is the yearly cost of borrowing the money itself. Fees charged when the loan is made, such as origination charges, go into the APR as well, so a loan with fees has an APR above its interest rate.
Does a lower interest rate always mean a cheaper loan?
Not always. Fees can make a lower-rate loan cost more, which is why the CFPB suggests comparing APRs, and a longer term adds interest even at the same rate.
Can my interest rate change after I borrow?
It depends on the loan. A fixed-rateFixed interest rateAn interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change. See more installment loanInstallment loanA loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan. See more keeps the rate it started with, while a variable rate, as the CFPB explains, is an index plus a margin and moves when the index does.
Do It in Buhata
Budget and repeating entries
Enter your loan payment in Buhata as a repeating monthly expense so it's counted in your Budget every month.
Open BuhataRelated Terms and Categories
- Variable interest rate
An interest rate that can rise or fall over the life of a loan or card because it's tied to an index, such as the prime rate, plus a set margin.
- Fixed interest rate
An interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change.
- Amortization
Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.
- Loan term
How long you have to repay a loan, usually stated in months for a car loan and in years for a mortgage.
Sources
Consumer Financial Protection Bureau, "What is the difference between a loan interest rate and the APR?"; CFPB, "What is the difference between a mortgage interest rate and an APR?"; CFPB, "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?"
- www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-loan-interest-rate-and-the-apr-en-733
- www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135
- www.consumerfinance.gov/ask-cfpb/for-an-adjustable-rate-mortgage-arm-what-are-the-index-and-margin-and-how-do-they-work-en-1949
Last updated .