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Taking out a personal loan can sometimes feel like a whirlwind.
Between submitting your information for a soft pull (otherwise known as getting prequalified) and evaluating loan offers to choose the best one, it’s easy to overlook the many personal loan fees that can get tacked onto the money you borrow.
Just like any kind of loan or credit product, personal loans come with interest charges. And that interest is colloquially known as APR. Most consumers understand that APR and interest are two financial terms often used interchangeably, when in fact their meanings differ slightly.
Ahead, Select explains and why your interest rate may be different than your overall APR.
Personal loans lenders charge interest rates ranging between roughly 2.49% to upwards of 24% (and sometimes higher). The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve.
Interest rates are expressed as a percentage applied to your remaining monthly balance. The rate determines how much you pay to borrow money over the lifetime of the loan. A two-year loan, for instance, gets paid back over a period of 24 monthly installments. Each month, a portion of your payment gets applied to the balance you still owe, while another percentage gets applied toward interest, or the fee you pay to borrow.
Interest rates can be fixed (stay the same for the life of the loan) or variable (subject to change from month to month).
What is APR on a personal loan?
At a first glance, it’s easy to confuse the annual percentage rate (APR) on a personal loan with its interest rate.
However, APR refers to the annual cost you pay in total, including both the interest rate and any fees associated with the loan, specifically origination fees and/or one-time administration fees.
When there are no extra fees, the APR is the same as the interest rate. However, many lenders charge origination fees ranging from 2% to 10%. Such fees won’t change your interest rate, but they do add on to the loan’s total cost.
So the advertised APR may include both interest rates and other fees. It’s important to do your research ahead of time to make sure you understand exactly what your loan will cost.
Here’s an example of a loan with both an origination fee and monthly interest rate.
If you took out a $10,000 loan that had an 8% origination fee, your lender would charge $800 up front before even giving you the money. When the money is deposited into your account, you’d only get $9,200. You’d still owe back the full $10,000, plus interest.
Let’s assume the interest rate is 9.46% and your repayment term is four years (48 months). According to Experian’s APR calculator, the total APR would be actually be considerably higher than the interest rate, at 13.10%, because you have to factor in the origination fee.
- Total loan amount: $10,000
- Origination fee: $800
- Amount deposited to your bank account: $9,200
- Interest rate: 9.46%
- APR: 13.10%
- Estimated monthly payment: $248.85
- Total interest paid over life of the loan: $1,944.82
- Total paid (interest + fees): $2,744.82
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