The annual percentage rate, or APR, plays a crucial role when applying for a personal loan or any form of credit, as it determines the total cost involved. It combines the interest rate with any fixed fees, such as origination fees, charged by your lender. The APR can vary significantly based on factors such as the lender selected, the loan amount, your credit score, income, and other relevant criteria.

The APR, expressed as a percentage, encompasses both the interest and fees you’ll pay annually on a loan. It serves as a tool for comparing the cost of various financial products like personal loans, auto loans, mortgages, and credit cards.

In evaluating personal loan options, the APR provides clarity on the total cost of borrowing and the monthly payments you’ll make.

To determine the APR for a personal loan, lenders incorporate the interest rate along with finance charges such as origination fees and administrative fees.

If you prefer to calculate it yourself, follow these steps:

  1. Add together the loan’s interest rate and all applicable fees.
  2. Divide this total by your original loan amount or principal balance.
  3. Divide the resulting figure by the number of days in your loan’s term.
  4. Multiply that result by 365.
  5. Finally, multiply this figure by 100 to convert it into a percentage.

Alternatively, you can use an online loan APR calculator for a more straightforward calculation process.

While APR and interest rate are sometimes used interchangeably, they have distinct meanings:

The interest rate represents the cost of borrowing money, expressed as a percentage of the principal amount borrowed. It applies to the outstanding balance and determines the amount of interest you pay over time.

On the other hand, APR (Annual Percentage Rate) includes not only the interest rate but also other charges such as administrative fees, origination fees, or application fees. Because of these additional fees, the APR is typically higher than the interest rate.

In cases where a lender does not impose any additional fees, the APR will equal the interest rate. However, loans without any fees are extremely uncommon.

APRs can fluctuate due to several factors such as your loan amount, loan duration, credit score, annual income, and debt-to-income (DTI) ratio. Personal loan APRs typically span from approximately 8 percent to 36 percent. As of July 3, 2024, the average APR for personal loans stands at 12.35 percent.

A favorable APR for a personal loan is generally considered to be below the national average. To qualify for such rates, typically below 12.35% as of July 3, 2024, you’ll likely need a credit score above 670 and a steady income—or a co-signer with similar creditworthiness.

Obtaining a low APR can lead to significant savings over the loan term. For instance, borrowing $10,000 over five years would result in over $3,000 in savings with an APR of 8% compared to 18%.

The APR is crucial for understanding your loan costs, but when comparing personal loans, several other factors are equally important:

  • Loan Term: Your APR is influenced by the loan term. Compare terms to find the best lender, considering how it affects your monthly payments and overall repayment amount.
  • Fees: Origination fees, typically 1% to 12%, affect your loan cost but aren’t part of the APR calculation. Also, watch for late fees and prepayment penalties, which can impact total expenses.
  • Eligibility: Beyond credit score and income, lenders may have specific eligibility criteria. Some operate only in certain states or focus on debt consolidation, so check these details.
  • Additional Features: Look for features like online applications, prequalification options, robust customer service, discounts, or protections like unemployment coverage to enhance your borrowing experience.

When considering any personal loan, the APR stands out as a critical factor in determining its overall cost.

Factors like good credit, a low debt-to-income ratio (DTI), and stable income can all contribute to securing a low APR. However, even with less-than-perfect credit, it’s possible to find an affordable loan by selecting lenders specializing in fair or bad credit loans or by applying with a co-borrower or co-signer. If applying alone, comparing rates for bad credit loans before submitting an application can help you secure the best available deal.