Difference Between Interest Rate and APR

‘Interest Rate’ vs ‘APR’

The interest rate applies when making investments and also when borrowing. When borrowing, the interest rate is the money that you have to give to the lender for a particular amount. In investments, the banks or financial institutions will give you money for the investments.

APR, or annual percentage rate, is the rate of interest that one has to pay while taking mortgages. The annual percentage rate is the interest rate calculated for a whole year rather than monthly.

From the above definitions, it is clear that interest rates are applied to both borrowing and investing whereas the APR or annual percentage rate is applicable to only mortgages or loans.

Interest rates are usually determined by supply and demand. It is calculated by dividing the interest charge by the actual amount of borrowing or investments. For example, if the lender is charging $60 a year on a loan of $1000, then the interest rate is 6 per cent (60/1000x 100 %).

The annual percentage rate is calculated on the basis of two things: interest rate and additional charges. The additional charges may include: closing fees, pre-paid interest, and mortgage insurance.
APR is the total interest that one has to pay on the initial amount that has been borrowed divided by the period of the loan or mortgage. An APR comes in two types: nominal and effective. In a nominal APR, the simple interest is computed for one year. In an effective APR, the compounded interest and fees are also included.
When comparing the two, the APR comes higher to the interest rate as additional charges are also taken into account.

Summary:

1. The interest rate applies when making investments and also when borrowing.
2. APR or annual percentage rate is the rate of interest that one has to pay while taking mortgages.
3. Interest rates are applied to both borrowing and investing whereas the APR or annual percentage rate is applicable to only mortgages or loans.
4. Interest rates are usually determined by supply and demand. It is calculated by dividing the interest charge by the actual amount of borrowing or investments.
5. The annual percentage rate is calculated on the basis of two things: interest rate and additional charges. The additional charges may include: closing fees, pre-paid interest, and mortgage insurance.
6. The APR comes in two types: nominal and effective.
7. When comparing the two, the APR comes higher to the interest rate as additional charges are also taken into account.

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