The annual percentage rate, or APR, is one of the most important factors to take into account when applying for a personal loan — or any type of loan — since it determines the overall cost. This figure is expressed as a percentage. It varies widely depending on the lender you choose, your loan amount, credit score and income, among other factors.

The APR is a percentage that represents the total amount of interest and fees you’ll pay over each year for any amount borrowed. This figure is used to compare the cost of borrowing different financial products, including personal loans, auto loans, mortgages and credit cards.

When comparing personal loan offers, the APR will help you determine how much the loan will cost you overall in addition to how much you’ll pay each month.

How the APR for a personal loan is calculated

To calculate the APR, lenders take the interest rate for a personal loan and add in the finance charges, which include origination fees and any other administrative fees.

Luckily, most lenders already have the APR listed on their sites. If you still want to crunch the numbers, you can do so by following a few steps.

  1. Add up the loan’s interest rate and fees.
  2. Divide that figure by your original loan amount or principal balance.
  3. Then, divide the resulting figure by the number of days in your loan’s term.
  4. Multiply that figure by 365.
  5. Finally, multiply that figure by 100 to turn that number into a percentage.

You can also use a loan calculator to get this percentage if you want to keep calculations simpler.

What is the difference between APR and interest rate on a personal loan?

While APR and interest rate are sometimes used interchangeably, there’s a difference between the two. The interest rate of a loan is the amount lenders charge borrowers for lending them money. This amount, expressed as a percentage, can be simple or amortized, and is charged on top of the principal balance or amount requested.

The APR, on the other hand, is a combination of the interest rate, along with other fees, such as administrative fees, origination or application fees, charged by the lender for issuing the loan. This is why the APR is often higher than the interest rate.

If a lender doesn’t charge any additional fees, the APR will be the same as the interest rate — but no-fee loans are extremely rare.

APRs can vary based on a variety of factors, including your loan amount, loan term, credit score, annual income and debt-to-income (DTI) ratio. APRs for personal loans can range from around 8 percent to 36 percent. According to a Bankrate study, the average APR for a personal loan is 12.10 percent as of March 13, 2024.

A good APR on a personal loan is typically one below 12 percent. But to qualify for it, you’ll need a credit score above 670 and a stable source of income or a creditworthy co-signer that meets these requirements.

Securing a low APR can save you thousands of dollars over the life of a loan, as shown in the table below.

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 with an APR of 6 percent than you would with an 11 percent APR. And if you have an APR of 18 percent, you would pay $2,191 more than you would with an 11 percent one.

When shopping for a personal loan, you might notice that the APRs offered vary significantly by lender. That is because lenders take into account other factors, such as the length of the repayment term, loan amount and purpose to determine your APR.

To improve your odds of qualifying for a low-interest loan, consider the following:

  • Picking a shorter loan term. Lenders typically offer lower rates on shorter term loans, as they involve less risk.
  • Opting for a smaller loan. Similarly, you pose less risk when you borrow less. A smaller loan may help you qualify for a lower APR.
  • Borrowing with purpose. It isn’t wise to go into debt for wants. A lender may impose a higher rate if you’re getting a loan to pay for a vacation than if you get a debt consolidation loan or a home improvement loan.
  • Choosing a loan with few fees. Some lenders charge minimal fees — or none at all. If possible, find one that keeps fees at bay, plus that offers rate discounts for things like signing up for automatic payments, to maximize your savings.

Additionally, you’ll need to have good-to-excellent credit, a low DTI ratio (36 percent or less), and a stable source of income to qualify for the lowest rates.

The APR can help you get a sense of what your loan will cost, but it’s just one of many factors to consider when you’re comparing personal loan offers.

Loan terms

After reviewing the lenders’ APRs, consider the loan terms. The APR will likely be different based on the term length. Compare terms to see which lender offers the better overall deal.

Additionally, the length of your repayment term will influence how much you’ll pay each month. Longer terms lead to a lower monthly bill, but also to more interest paid over the life of the loan.

Fees

Lenders may charge fees in addition to interest. Origination fees usually range between 1 percent to 10 percent, and are common among online lenders. Also look for fees that may sneak up on you, such as late fees and prepayment penalties. These may not be factored into the APR, but they can impact your total cost.

Eligibility

Note that lenders may have eligibility criteria beyond the basic credit score and income requirements. Some lenders only serve customers in certain states while others only offer personal loans to those looking to consolidate debt.

Additional features

Lastly, look at other features that might make your borrowing experience smoother. These include easy online applications, prequalification tools, a range of customer service hours, discounts and unemployment protection.

The bottom line

When it comes to personal loans, the APR is one of the most important factors to consider, as it will help you figure out the overall cost of the loan, in addition to how affordable it may be for you. Good credit, a low DTI ratio and a stable source of income can all help you secure a low APR. But even if you have less-than-perfect credit, you can still secure an affordable loan by choosing a lender that specializes in fair or bad credit loans or by applying jointly with a co-signer.

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