Many people assume that the interest rate and APR (annual percentage rate) on a loan are the same thing. The truth is that the APR is the real cost of your debt, while the interest rate is more of an estimation. You should ask your creditors about the APR that you will be paying before closing or signing papers for a new debt account.
Interest
The interest on a debt is the cost of doing business with a creditor or lender. It is pretty much synonymous with "profit" for the creditor.
Misconceptions
APR is not the same thing as the interest rate. The APR is the yearly interest rate plus additional finance charges associated with the use and generation of the debt, such as transaction fees and balance transfer fees.
APR and Mortgage Loans
When it comes to mortgage loans, your APR includes your interest rate plus closing costs and any points the lender is charging.
Considerations
While the interest rate on your loan is a good estimation of what your debt will cost you, don't neglect the importance of the APR when making a decision regarding a loan.
Requirements for Interest Rate and APR
When you get a mortgage loan, the lender is required by law to list both your interest rate and your APR conspicuously.
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