The difference between APR and Interest Rate

UPDATE!!! Check out how to calculate APR and use it when you shop a loan!!

Why is my “annual percentage rate” (aka APR) higher than my interest rate?⁣⁣⁣
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This is a frequent question I get asked during the mortgage process, and the answer to this is rather confusing! ⁣⁣⁣
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The confusion starts with the name Annual Percentage Rate... it implies that this is the “interest” percentage that you pay annually for your house, your car, your boat, (your fill in the blank if it’s financed)... ⁣⁣⁣
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While that is true to some extent, it does not explain that your APR includes way more than just interest. It includes ANY fees associated with obtaining financing. Which is why your APR is typically higher than your “locked in rate”!⁣⁣⁣
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I break this down in more detail along with why financial gurus emphasize knowing this figure on today’s Money Tip! ⁣⁣⁣
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I would love to answer your finance questions! Let me know below if there is a topic you want us to break down in a future MTM! ⁣⁣

Thank you for tuning in!!!

Lizy

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👉Instagram @lizyirvine

🎙Text "LIZY" to 21000 for updates on our market podcast

Lizy Hoeffer NMLS ID # 260183. AZ LO-0913409

[Angela-wy]

No lie, this video made it easy to understand the difference between interest rate and APR. Thank you for 'dumbing it down' for real people. :)

[rw]

Wow so clear and easy to understand got a new subscriber!

[LuisGonzalez-dqbg]

Good video, but we need side by side comparison of a (some?) sample scenario(s).

This is a theoretical explanation, but I am still uneasy about the math/numbers behind the difference of both percentages.

Thank you!

[melissaeatsitall]

I must be a dud, I still don't understand haha.

[alwaysinsearch]

When choosing a loan should I focus on who has the lowest interest rate or lowest monthly costs?

[aj_english]

Thank you Miss Hoeffer, this helped me a ton and was very well explained. Thank you for your time in making this video and putting out there.

[Engineerboy]

Good job, thank you for a nice short general explanation. I needed a quick refresher :)

[OmedyStories]

Hey Lizy, I just watched your video and I must say that it was really informative and well-made. I was wondering if I could help you edit highly engaging thumbnails ?

[tigerlilly]

Thank you, and nice to meet you and see you, but this would have been better to see this in black and white... sample scenarios...

[MrBurgerPal]

This vid has the most views on your channel, for MASSIVE reasons. but seriously, more thumbnails like this one would blow the channel up for financial information

[chowtimex]

You just explained it like a bank would still not getting it just looking at you i already knew you were going to do that

[edwizard]

I'm more confused now. Thank you.

[hamzaouladbenayad]

Very cool, I liked it very much and I loved you. Greetings from Morocco

[jasminpantojas]

Thanks for the information it was very helpful ...

[gloomiehoodie]

Yep, watch out for those letters in mail with those attractive refinance rates...they want your money with their APR, which is a percentage of our loan. They attract you with their 2.49% interest rate (which has lots of variables and hard to get) and on top that they hit you with their 3.5% APR with saying no points or closing costs, which is total bolone, the APR are these fees hidden behind this fancy acronym. In sum, if you get a APR of 3.85% on a loan of $400K, you will pay $15, 000.00 typically added to your loan.

[jeraldschumann]

Something more that I want to know the cycle and the due date, and how my interest, APRs, fees and everything when using a credit card

[jeraldschumann]

I love your videos, I would like to know about the difference between interest and fee, also about how the APR work on our credit cards, moreover I would like to know about credit cards and the difference between paypass and the chip credit card.

[PhuongVo-tmob]

Great video...Thank you and I have subscribed.

[rickyngaue]

So the interest rate would be included in the APR?

[johanp]

You have to be careful when using the term APR since it is an ambiguous term. What confuses in consumer loan and bank statements is more often the stated APRC (Annual Percent Rate of Cost) .

The APRC is formally defined as: The nominal annual interest level that equates the present value of all drawdowns with the present value of all repayments (the present value cashflow=0) . (In definition it is written as a mathematical equation - two geometric sums equated).

This is the official definition used by both FCA and EU regulations. It is not in itself a terribly complex thing to explain but it takes a bit more math and an hour and half or so to explain to a layman. It is often misunderstood and even banks calculate it incorrectly. Especially when used for very short loans (a couple of months) where it can give numerically very high values (can easily be >> 10000%) due to the often very high fees on short loans.

The detailed calculation is also dependent on the date convention used (the simplest being if you take into account leap year or not). Formally then EU regulation is not clear on this (and worse - is even self contradictory). However, the FCA regulation clearly states that leap years needs to be taken into consideration and that a month is 365/12 days.