• Annual Percentage Rate (APR) vs Interest Rate

    Whenever you take any form of credit such as a loan or a credit card, you will come across the terms 'annual percentage rate’ and ‘interest rate’. Both the terms sound quite similar. Many a time, many borrowers tend to get confused with these two terms.

    Annual Percentage Rate (APR) and interest rate are very common terms in the world of loans. So how can these 2 terms be understood clearly? Let us find out everything about annual percentage rate (APR) and interest rate by reading the following article. We can even learn to spot the differences between these 2 concepts with the article given below. When you understand the difference between the both, you may even save a lot of money effectively.

    Meaning of Annual Percentage Rate (APR)

    Annual percentage rate or APR refers to the annual rate that a borrower will need to pay as he or she is borrowing the funds. This rate is expressed in the form of a percentage and it indicates the original annual cost of funds over the period of a particular loan.

    In short, it is the ‘expense’ of the loan that you will be incurring. However, it is expressed in the form of an interest rate.

    For a personal loan, there can be both fixed and floating or variable APRs. A loan with a fixed APR will have a rate that will remain unchanged throughout the loan tenure. A loan with a floating or variable APR will have a rate that will change according to changes in various factors such as market conditions, etc.

    Meaning of Interest Rate

    Interest rate is the certain amount of interest that is unpaid for a particular period. This interest rate will be fixed according to the amount that is borrowed, the loan principal amount, the loan tenure, and the frequency of the loan being compounded.

    It is typically a percentage of the loan principal amount that is charged by a lender since the borrower is utilising the funds offered by the lender.

    Comparison between Annual Percentage Rate and Interest Rate

    An annual percentage rate is described as the overall annual cost of a personal loan that will be incurred by the borrower and this cost comprises the fees that are paid for the personal loan. The fees can be loan processing fee, personal loan insurance (if any), closing costs, etc. On the other hand, an interest rate refers to the interest that is levied on the personal loan amount without considering any other expenditures of the loan. Since a personal loan’s APR involves all these costs, it is higher than a personal loan’s interest rate.

    You will need to bear in mind that when your APR is high, your loan expenses will be high. An APR is a broad concept when compared to an interest rate of a loan. However, you need to consider both these rates in order to understand the actual cost of your personal loan.

    Understanding only one of these rates will not help you determine your loan expenses. Hence, you need to take into account both the rates to plan your loan expenses efficiently.

    How do Annual Percentage Rate and Interest Rate Affect Your Personal Loan Differently?

    If you want to concentrate only on paying the lowest amount on a monthly basis for your personal loan, you should then look keenly at the interest rate of your loan and not on the APR of the loan. This step will help you determine and get a very low monthly installment amount. This way, you can make sure that your monthly expenses for your personal loan are low in nature. Focussing only on the interest rate will enable you to look at your loan’s expenses on a monthly basis and not for the entire loan tenure.

    On the other hand, if you want to know the overall cost for your full personal loan period, you will need to concentrate on the annual percentage rate. When you are aware of a particular loan deal’s APR, you can compare it with other loans’ APRs. You can accordingly make a decision and you will be aware of all your loan’s total expenses for the entire loan tenure.

    A very important point for you to note is that your monthly loan installment will be determined according to your interest rate and not according to your annual percentage rate. Hence, you will need to look at each loan’s APR and actual interest rate to make a flawless and sensible financial decision.

    Understanding the Time Horizon of Your Personal Loan to Choose from APRs and Interest Rates

    When multiple banks and non-banking financial corporations (NBFCs) offer a wide variety of personal loans with different annual percentage rates and interest rates, it is very difficult for you to pick one without getting confused. However, you can assess and evaluate your specific preferences and requirements to help yourself choose the right personal loan product.

    You will need to assess the tenure of your personal loan and choose a loan as per its APR and interest rate. If you are interested in taking a personal loan for a very long period, you should ideally take a loan with the lowest APR. This particular move will make certain that you pay very less for your personal loan over the entire tenure.

    However, if you are keen on applying for a reasonably short-term personal loan, then it is better to pay a higher interest rate and a higher APR. So, you can choose a personal loan with a pretty high-interest rate and a high APR. In this case, your one-time processing fee will also be quite high. However, during the first few years of your personal loan tenure, your loan costs will be pretty less.

    An annual percentage rate typically distributes the loan fees over the full loan period. Hence, it makes sense to pay a low APR for your personal loan only if you choose a long tenure for your loan.

    How to use a personal loan sensibly?

    You can use a personal loan for any legitimate reason. That is the best part of a personal loan. It can be utilised for any purpose and what’s more, you do not have to mention the reason for taking the personal loan to your lender! You can apply for a personal loan from a bank or from a non-banking financial corporation (NBFC) or even from a licensed moneylender.

    You can apply for the loan by visiting a bank branch, by calling a customer care representative of any bank through phone, or by applying online. You can apply for a loan online by visiting the official website of a bank or by going to any third-party financial website.

    There are multiple third-party financial web portals now in India that will help you in browsing various personal loan options and comparing various options. You may also check out each loan product’s interest rates, processing fee, pre-payment penalty, annual percentage rate (APR), part-payment fee, and other features and benefits online itself! After having a clear look at each loan’s features, you can decide which loan to opt for. Online loan applications assist you in taking a sensible and clear-cut financial decision.

    You can utilise a personal loan for the following reasons:

    • To renovate or remodel your living space
    • To make wedding arrangements for your own wedding or your sibling’s wedding or any loved one’s wedding
    • To purchase a brand new two-wheeler
    • To sponsor your education course or to pay fees for your course
    • To handle your child’s higher education expenses
    • To manage festival-related expenses for purchasing gifts, for decorating your abode, for purchasing consumables that are of high value, for purchasing electronic appliances, etc.
    • To consolidate your debts and combine them into a single personal loan account. You can consolidate your other loan debts, your credit card debts, and any other form of previous debts. Once you take a personal loan for debt consolidation, you can organize and manage all your funds efficiently without having to monitor each debt separately. You will also be given an opportunity to clear all your debts proficiently without going through a hassle.
    • You may also take a new personal loan to transfer your loan balances from another personal loan account maintained with a different lender. A personal loan balance transfer facility will help you in securing a lower interest rate and a better annual percentage rate (APR), in getting a higher loan tenure to repay your previous debts, and in getting additional benefits such as personal loan insurance, etc.

    Apart from these above-mentioned reasons, you may also use a personal loan for funding any of your immediate high-value requirements. All you need to do is make sure that you repay your loan on time by clearing each of your loan equated monthly installments (EMIs) on time. This will help you have a peaceful borrowing experience and it will also assist you in maintaining a high credit score, which is highly essential in today’s credit market.

    How to understand your loan’s annual percentage rate (APR) and interest rate?

    When you apply for a personal loan, some lenders may provide you with some form of a loan estimate sheet. This will differ from lender to lender. You can check out the loan estimate sheet for complete details about your personal loan’s annual percentage rate (APR) and interest rate. You may find a section known as ‘Comparisons’. Here, you will get a clear picture of your personal loan’s rates.

    What is the meaning of 0% Introductory annual percentage rate (APR)?

    Many a time, you may have come across the term ‘0% introductory annual percentage rate (APR)’ when you look for personal loans or credit cards. It is a very interesting and attractive incentive provided by lenders across the globe. During the introductory period of your personal loan, you can enjoy a 0% annual percentage rate (APR). Some borrowers may not see this as a proper incentive and many may not bother to make use of this benefit. However, in financial practicality, it is a highly beneficial mode of making your personal loan expenses low. When your lender provides you with a 0% introductory annual percentage rate (APR), you should take it immediately before you lose it. It is a very beneficial incentive that will help you keep your loan expenses in moderation. Very few borrowers are provided with this benefit by a lender.

    When you secure a 0% introductory annual percentage rate (APR), it indicates that you do not have to pay any form of interest on your personal loan for a particular time frame. The time frame is usually the beginning period of your entire loan tenure. Now, this is a great boon for your borrowing process as you get to enjoy 0% interest rate for a certain period. It refers to an interest-free period! Your 0% introductory annual percentage rate (APR) period can typically range from 6 months to one year! This means that you do not have to pay any interest for so many months! You will be able to save so much money as you will not be paying any interest.

    A very important point to note is that during your initial period of your personal loan tenure, your loan expenses will typically be dominated by interest. In your equated monthly installments, the breakup of your payments will be interest expenses during the initial months of your tenure, and then the following months of your tenure will constitute your loan principal. As your loan tenure continues, your loan expenses will be dominated by your loan principal amount. However, when you have a 0% introductory annual percentage rate (APR), you will not be paying any interest and hence, this indicates that it is a splendid way to minimise your loan expenses!

    When is it ideal to go for a 0% Introductory annual percentage rate (APR)?

    When you get a 0% introductory annual percentage rate (APR), it makes sense to strengthen or expand your expenses as you would not have to pay any interest at all. It is ideal to utilize your 0% introductory annual percentage rate (APR) for:

    • Paying your previous high-interest debts such as your former loan debts or credit card debts
    • Making a high-value one-time purchase such as a foreign vacation, purchase of a high-value two-wheeler, purchase of new goods for your new home after shifting, remodeling or renovating your house, etc.
    • Making an emergency financial transaction of high value. This can be a medical treatment, purchase of high-value medicines, repairing your vehicle after an accident, emergency flight ticket bookings, etc.
    • Making use of a high-value gift coupon that offers discounts on a vacation or on a purchase of jewellery, etc.

    Whenever you apply for a personal loan, you need to make certain that you understand the meaning of both APR and interest rate. You should also be able to recognize which is which in the loan that you apply for. Moreover, decide which loan makes perfect sense by comparing both APR and interest rate. If you want, you may also take the assistance of your bank representative to understand the 2 rates of your loan and then pick the right one. Remember, that there is no hurry in selecting a loan. You can do it after you make numerous comparisons, which can be done online now, with just a few clicks!

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