What is the APR on a personal loan?
The Annual Percentage Rate, or APR, is one of the most important factors when applying for a personal loan or any type of loan, as it determines the total cost. These numbers, expressed as percentages, can vary widely depending on the lender you choose, as well as your loan amount, credit score, and income, among other factors.
What is APR on the loan?
The annual percentage rate is the percentage that represents the total amount of interest and fees that you will pay each year for the amount borrowed. This data is used to compare the cost of borrowing for various financial products, including personal loans, auto loans, mortgages, and credit cards.
When comparing personal loan offers, the APR will help you determine how much you will pay each month as well as the overall cost of the loan.
How is a personal loan's APR calculated?
To calculate the APR, lenders take the personal loan interest rate and add financing fees, which include origination fees and any other administration fees.
Fortunately, most lenders already have the APR listed on their websites. If you still want to reduce the numbers, you can do so by following a few steps.
- Includes interest rates and fees on loans.
- Divide this number by the actual loan amount or the actual balance.
- Then divide the resulting number by the number of days in your loan term.
- Multiply this number by 365.
- Finally, multiply the number by 100 to convert the number to a percentage.
If you want to keep the calculation simple, you can also use a loan calculator to get this percentage.
What is the difference between Annual Percentage Rate (APR) and Interest Rate on a Personal Loan?
Although APR and interest rate are sometimes used interchangeably, there is a difference between the two. The interest rate on a loan is the amount that lenders charge for lending to borrowers. This amount, expressed as a percentage, may be simple or amortized, and is charged in addition to the original balance or the requested amount.
On the other hand, the APR is a combination of the interest rate, along with other fees, such as administration fees, origination or application fees, that the lender charges for issuing the loan. As a result, the APR is frequently larger than the interest rate.
If the lender charges no additional fees, the APR will be the same as the interest rate - but loans without fees are extremely rare.
What is the average APR for a personal loan?
APRs can vary based on a variety of factors, including loan amount, loan term, credit score, annual income, and debt-to-income (DTI) ratio. APRs for personal loans can range from about 5 percent to 36 percent. According to a study by Bankrate, the average APR for a personal loan as of August 2, 2023 is 11.29 percent.
What is a good APR on a personal loan?
A good APR on a personal loan is usually less than 11 percent. But to qualify for it, you'll need a credit score above 670 and a stable source of income or a trusted co-location that meets these requirements.
Getting a lower APR can save you thousands of dollars over the life of the loan, as shown in the table below.
APR Monthly Payment Total Cost
6% $193.33 $11,599.68
11% $217.42 $13,045.45
18% $253.93 $15,236.06
If you borrow $10,000 for five years, you will pay $1,446 less at an APR of 6 percent compared to an APR of 11 percent. And if your APR is 18 percent, you'll pay $2,191 more than if you had an APR of 11 percent.
How to get the lowest annual percentage rate (APR) on your personal loan
When shopping for a personal loan, you may find that the APR offered by lenders vary widely. This is because lenders take into account other factors, such as the repayment period, loan amount, and purpose, to determine your annual percentage rate (APR).
Consider the following to increase your chances of qualifying for a low-interest loan:
Choose a short-term loan. Lenders generally offer lower interest rates on short-term loans, because they carry less risk.
Choose a small loan. Likewise, when you borrow less, you take on less risk. A smaller loan can help you qualify for a lower APR.
Borrowing with a purpose. It is not wise to borrow for the sake of desires. The lender may charge a higher rate if you are taking out a vacation loan than if you are taking out a debt consolidation or home improvement loan.
Low fee loan options. Some lenders charge little or no fees. If possible, to maximize your savings, find a site that offers discounts on things like signing up for automatic payments that keep fees low.
In addition, you must have good to excellent credit, a low DTI ratio (35 percent or less) and a stable source of income to qualify for the lowest rates.
How to compare personal loan rates
The APR can help you understand the cost of your loan, but it's just one factor among many when comparing personal loan offers.
Loan terms
After evaluating the lender's APR, consider the terms of the loan. The annual percentage rate (APR) is likely to vary based on the length of the term. Compare terms to see which lender offers the best package deal.
In addition, the length of the payment term will affect the amount you will have to pay each month. Longer periods result in a lower monthly bill, but also higher interest paid over the life of the loan.
Fees
Lenders can charge an additional fee in addition to interest. The origination fee usually ranges from 1% to 10% and is popular among online lenders. Also, look for fees that might sneak up on you, such as late fees and prepayment penalties. It may not be included in the APR, but it can affect the total cost.
Eligibility
Note that lenders may have eligibility criteria beyond basic credit score and income requirements. Some lenders only serve consumers in certain states while others only provide personal loans to people who want to consolidate debt.
Additional features
Finally, look at what other features can make your borrowing experience smoother. These include easy online applications, pre-qualification tools, a range of customer service hours, discounts and unemployment protection.
Bottom Line
When it comes to personal loans, one of the most important factors to consider is the APR, as it will help you estimate the total cost of the loan, as well as how much it can afford you. Good credit, a low DTI ratio, and a stable source of income can help you secure a low APR. But even if you have less-than-ideal credit, you can still get an affordable loan by choosing a lender or applying jointly with one of the co-signers.
