June 21, 2021

Why is My Personal Loan APR Different Than the Interest Rate?

Select’s editorial team works independently to review financial products and write articles we think our…

Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

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.

What is interest on a personal loan?

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?

APR and interest comparison

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

How to get a personal loan

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.