Should I compare loans by apr or interest rate?
Compare loans by APR, not interest rate. The interest rate covers only borrowing costs, while the APR also folds in upfront fees like origination fees. Two $10,000 three-year loans both quoted at 6% can show APRs of 6.0% and 8.9%; the second costs $420 more, exactly its origination fee.
How to do it
- Line up offers for the same amount and termAPR comparisons work best like for like. A 3-year and a 5-year loan can have similar APRs but very different total costs.
- Skip the headline rate and find the APR lineThe APR is usually printed in the loan disclosure or the fine print below the advertised rate. If you can't find it, ask the lender for it in writing.
- Check which fees the APR includesOrigination fees are usually folded into the APR, but some charges may sit outside it. Ask the lender for a full list of upfront fees.
- Pick the lowest APR, then confirm the total costMultiply the monthly payment by the number of payments and add any upfront fees. For the same amount and term, the lower APR usually comes out cheaper.
Questions that come up
Does this work for credit cards too?
Only partly. On most credit cards the APR is simply the interest rate, and annual fees or balance-transfer fees are usually listed separately rather than folded in. For cards, compare the APR together with the fee table, especially if you carry a balance.
What if I plan to pay the loan off early?
The APR spreads upfront fees over the full term. If you repay early, that fee weighs more per year than the APR suggests, so a high-fee loan gets even more expensive. In that case a no-fee loan with a slightly higher rate can win. Also check for prepayment penalties.
Is the lowest APR automatically the best deal?
Not automatically. It's a reliable guide when the amount and term match. A longer loan can show a lower APR but still cost more in total interest because you pay for more years. Compare the total repaid alongside the APR before choosing.
Full transcript
Both say 6%. Compare the APR. Skip the big headline rate and scroll to the APR line. The APR folds in the upfront fees the rate hides: $420 here. Loan B costs $420 more. Same 6%, different APR.