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Annual Percentage Rate vs Interest Rate

Interest Rate is not the same as Annual Percentage Rate.

It is very important for buyers of any product to understand the difference.

Interest Rate:

The percentage rate interest charged on remaining principal balance of a loan. The principal is the original amount of money lent.

Annual Percentage Rate (APR)

This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, such as Points, Loan Origination Fee, Credit Application, etc and is expressed as the total percentage of cost of the loan; not what is charged on the unpaid principal.  The APR is always higher than the actual note rate on your loan.

EXAMPLE

Each Point = yields the lender approximately 1/8% above the quoted interest rate and costs 1% of the loan amount.

A loan of $100,000 with having to pay 3 points to get an interest rate of 4% would be as follows:

COST         $100,000 x 3% = $3,000

APR            4% + 3/8% = 4 3/8%

 

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