Loans are part of our everyday life; we all take loans for our houses, cars and business. It is important to know the difference between Rate and Annual Percentage Rate or APR, because they play a very important role in deciding terms and conditions of your loan. Rate and APR determine your monthly payments, which you have to pay to lender, against the loan you have taken.
Rate is the fee, which you pay to borrow money. We all take loans, sometime to buy homes, sometime for cars, or even when we shop through credit cards; we are borrowing money from our bank. The fee which bank or other lender will be charging from us, for lending us his money, is rate. Actually, it is interest rate or mortgage rate, but generally called as rate. It is the charges, which we pay for our convenience, as we can buy a new car by taking a loan, which we might not afford otherwise. Rate is usually a round figure like 4% or 5%, for instance, if you have taken a loan of $ 100,000 and your rate is 5%, you have to pay $ 5,000. It is just the interest rate on the amount of your loan nothing else is included.
When you take loan from a lender, he charge you not only interest rate but you have to pay many other fees as well, like upfront fees, insurance fees and many others, all these extra charges and your actual rate, combine to make Annual Percentage Rate, which is the actual money you have to pay to your lender. There are no hard and fast rules for APR calculation; each lender has its own formula to calculate APR. However, as it gives full picture of your loan, that how much you will be paying annually, you can compare APRs offered by different lenders and then choose your lender, which offers you loan in easy installments. But be careful, some lending agencies, does not include all charges in APR, to keep it low, which attracts more customers for them, so before making any agreement, you should read all terms and conditions carefully.
Differences and Similarities between Rate and APR
Rate and APR are very important in calculating your monthly installments, which you have to pay against your loan. Rate is simple the monthly interest rate, in round figure, where as APR is more complicated, as it includes many other fees as well. Rate is easy to calculate, on the other hand, APR is complicated as different companies charge different fees for their services. As many other fees are also added in APR, so it is higher than Rate. APR refers to the true cost for your loan, whereas Rate is just the percentage interest rate.
Rate is important for calculating your loan installments, but be careful when it comes to APR, as there are no proper guidelines in law, telling which fees should be included and which should not be, which makes APR confusing. It also provides an opportunity to the lender to deceive you, if you are not cautious.