The Annual Percentage Rate (APR) is one of the most important factors when applying for a personal loan, or any credit, as it determines the total cost. The APR is a combination of the interest rate and any set-up fees (such as origination fees) charged by the lender.
APRs vary widely depending on the lender you choose, your loan amount, your credit score, your income, and other factors.
What is the loan APR?
The APR is a percentage that represents the total interest and fees paid each year. It can be used to compare borrowing costs for different financial products, including personal loans, auto loans, mortgages, and credit cards.
When comparing personal loan offers, the APR helps you determine the total loan amount and monthly payment.
How to Calculate APR for a Personal Loan
To calculate the APR, lenders take the interest rate on a personal loan and add in finance charges, including origination fees and other administrative fees.
Many lenders publish their APRs online, and if you want to calculate it yourself, you can do so in just a few steps.
- Add up the interest and fees on the loan.
- Divide that number by the original loan amount, or principal balance.
- Then divide the resulting number by the number of days in the loan’s term.
- Multiply that number by 365.
- Finally, multiply that number by 100 to convert it into a percentage.
If you want to make the calculation easier, you can also use a loan APR calculator to get this percentage.
What is the difference between APR and interest rate on a personal loan?
APR and interest rate are sometimes used interchangeably, but interest rate is the amount charged when you borrow money. Interest is expressed as a percentage and can be simple or amortized. Interest is charged on top of the principal balance, which is the amount borrowed.
On the other hand, the APR is a combination of interest rates and fees. This can include administrative fees, loan fees, application fees, etc. For this reason, the APR is often higher than the interest rate.
If a lender doesn’t charge an additional fee, your APR will be the same as your interest rate, but no-fee loans are very rare.
What is the average APR for a personal loan?
APR depends on a variety of factors, including loan amount, loan term, credit score, annual income, debt-to-income ratio (DTI), etc. APR for personal loans ranges from about 8% to 36%. According to Bankrate research, as of August 14, 2024, the average APR for a personal loan is 12.38%.
What’s a good APR for a personal loan?
APRs on personal loans are usually below the national average, but to qualify, you’ll likely need a credit score above 670 and a steady source of income, or a creditworthy co-signer who meets these requirements.
Securing a low APR can save you thousands of dollars over the life of your loan: if you borrow $10,000 over five years, for example, an 8 percent APR will cost you more than $3,000 less than an 18 percent APR.
| April | Monthly payment | Total cost |
|---|---|---|
| 8% | $202.76 | $12,165.84 |
| 13% | $227.53 | $13,651.84 |
| 18% | $253.93 | $15,236.06 |
How to Compare Personal Loan Interest Rates
While the APR can help you get an idea of how much your loan will cost, it’s only one of many factors to consider when comparing personal loans.
- Loan Term. Your APR will likely be based on the length of the term, so compare terms to choose the best lender. The term of your loan will also affect your monthly payments and total payment amount.
- commission. Lenders may charge a variety of fees, but most have an origination fee that ranges from 1 to 12 percent. Late fees and prepayment penalties aren’t factored into the APR but can affect your total cost.
- Qualifications. Lenders may have eligibility criteria beyond basic credit score and income requirements. Some lenders only serve customers in certain states, while others only offer personal loans to people looking to consolidate their debt.
- Additional features. Also consider other features that can make your borrowing experience smoother, such as an easy online application, pre-qualification tools, various customer service hours, discounts, unemployment protection, etc.
Conclusion
No matter what type of personal loan you choose, the APR is one of the most important factors as it helps determine the overall cost of the loan.
Good credit, a low DTI ratio, and a steady source of income can all help you secure a low APR. But if your credit isn’t perfect, you can still secure an affordable loan by choosing a lender that specializes in fair or bad credit loans, or by applying with a co-borrower or co-signer. If you don’t have a co-signer or co-applicant, be sure to compare interest rates on bad credit loans before applying to get the best terms available.
