Understanding Annual Percentage Rates (APRs) on Personal Loans

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ByChristopher Boston
Reviewed byAlvin Yam, CFP
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ByChristopher Boston
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Reviewed byAlvin Yam, CFP
Edited byCasie McCoskey
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Updated: February 25, 2024

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A personal loan is a versatile financial solution that offers consumers the means to cover various needs, from consolidating debt to financing major purchases. When considering a loan, a significant factor to take into account is the annual percentage rate or APR. This rate encapsulates the total cost of borrowing, combining the interest and any associated fees.

Understanding the APR on personal loans is helpful as it significantly affects the total loan cost and determines the monthly repayments. Knowing how APR works enables you to make well-informed choices, ensuring you select a loan that aligns with your financial situation and goals.

What Is APR?

APR is a key term in understanding personal loans. It tells you your loan's yearly cost, including the interest you'll pay and other charges, like origination fees. Think of the APR as a more complete measure of your loan cost compared to just the interest rate, which doesn't include these extra fees.

For example, if you take a personal loan with an interest rate of 5% and a 2% fee for processing the loan, the APR won't be just 5%. Instead, the APR will be around 7%, as it includes both the interest and the processing fee. This higher percentage reflects the actual annual cost of your loan.

When looking at different loan options, comparing APRs can give you a clearer picture of which loan is more expensive in the long run. This is important because a lower interest rate doesn't always mean a cheaper loan if there are high fees included, which the APR takes into account.

APR vs. Interest Rate

Understanding the APR and the interest rate on personal loans helps borrowers make informed financial decisions. While they may seem similar, they serve different purposes in the context of a personal loan.

The interest rate on a personal loan is a percentage that represents the cost of borrowing the principal amount. It's a straightforward figure charged on top of the loan principal or the amount you borrowed. However, the interest rate doesn't include any additional fees or charges that might come with the loan.

On the other hand, the APR is more encompassing. It includes the interest rate and all other fees associated with the loan, such as origination fees, processing charges, or any other costs required to secure the loan. As a result, the APR typically ends up being higher than the interest rate. The APR gives you a comprehensive picture of the total loan cost annually, making it a more accurate tool for comparing different loan offers.

Factors Affecting APRs on Personal Loans

Several key factors influence the APR on your personal loan. By understanding how these play a role in determining the cost of your loan, you can make a more informed decision when selecting a loan.

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    Credit Score

    Your credit score is a major determinant of your loan's APR. Lenders use it to gauge your creditworthiness. A higher credit score often leads to a lower APR, as it suggests a lower risk to the lender. Conversely, a lower credit score can result in a higher APR, reflecting the increased risk of lending to you.

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    Loan Term

    The duration of your loan also impacts the APR. Longer loan terms might come with higher APRs due to the extended risk period for lenders. However, shorter loan terms can also lead to higher APRs as lenders aim to cover their administrative costs more quickly.

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    Loan Amount

    The size of the loan can affect its APR. Larger loans might have lower APRs, as they are often more profitable for lenders. Smaller loans may carry higher APRs to compensate for the lower overall interest the lender earns.

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    Debt-to-Income Ratio

    Your debt-to-income ratio, which is the amount of your income that goes towards paying debts, influences the APR. A high debt-to-income ratio can lead to a higher APR, as it suggests a greater risk that you might struggle to repay the loan.

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    Annual Income

    Finally, your annual income plays a role in determining the APR. A higher income can lead to a lower APR, as it indicates a greater capacity to repay the loan. Conversely, a lower income might result in a higher APR, reflecting the increased risk to the lender.

How to Calculate APRs on Personal Loans

Calculating the APR on personal loans will help you understand the true cost of borrowing. It involves a specific formula that takes into account the interest rate, loan fees and the loan term:

APR = ((Interest + Fees / Loan amount) / Number of days in the loan term)) x 365 x 100

To calculate the APR, start by adding any loan fees to the interest charges (the cost of borrowing money from your lender). Your loan agreement or statements should note these figures. Then, divide the sum by the principal balance, which is your original loan amount. Once you have this figure, divide it by the total number of days in the loan term. The resulting figure is multiplied by 365 (representing one year) and then multiplied again by 100 to make the number a percentage.

By understanding and applying this calculation, you can make more informed financial decisions when evaluating your personal loan options.

Typical APRs on Personal Loans

The average range for the APR on personal loans can vary widely, often falling between 6% and 36%. However, a good APR for a personal loan typically depends on factors like your credit score, income and the lender's terms. Generally, an APR closer to the lower end of this range is considered favorable.

For borrowers with excellent credit histories and stable incomes, lower APRs are more accessible, indicating a cost-effective loan. On the other hand, higher APRs may be the only option for those with less favorable credit histories, reflecting the increased risk for the lender.

Similarly, the interest rates, which are a component of the APR, also vary for personal loans. These are primarily influenced by market conditions, the lender's policies and the borrower's financial profile. According to the Federal Reserve, the average interest rate on a two-year personal loan is 12.35% as of November 2023.

Why APR Matters When Choosing a Personal Loan

The APR directly impacts your loan repayments and the total amount you'll pay back over time. Essentially, APR determines the cost of your loan each year, encompassing both the interest and any additional fees. A higher APR means you'll pay more over the life of the loan, while a lower APR reduces the overall cost.

To illustrate the long-term financial implications of different APRs, consider this table of sample loans:

Loan Amount
Monthly Payment
Total Interest Paid
Total Repaid


5 years






5 years






5 years





This table demonstrates how a higher APR significantly increases both the monthly payment and the total amount paid over the life of the loan. For instance, a loan with a 5% APR will cost $4,637 less in total than the same loan with a 20% APR. Note that this calculation doesn't account for monthly compound interest accrual, which is common for personal loans.

When evaluating personal loan options, considering the APR helps ensure that you choose a financially manageable loan that aligns with your long-term financial goals.

How to Get the Lowest APR on a Personal Loan

Aiming for the lowest possible APR on your personal loan is forward-thinking for your financial well-being. A lower APR not only reduces the amount you pay in interest but also lessens the overall burden of the loan. This approach is key to managing debt effectively and ensuring your loan remains affordable over its term.

To achieve the lowest APR on personal loans, consider the following tips:

Improve Your Credit Score

A higher credit score demonstrates creditworthiness, often leading to better loan offers. Regularly check your credit report, clear outstanding debts and make timely payments to improve your credit score.

Shop Around for Different Lenders

Compare loan offers from various financial institutions, including banks, credit unions and online lenders. Each lender has different criteria and rates, so shopping around increases your chances of finding the lowest APR.

Consider a Secured Loan

Secured loans, which are backed by collateral, typically have lower APRs than unsecured loans. If you have assets like a car or home equity, using them as collateral can lead to more favorable rates.

Choose a Loan With Fewer Fees

Loans with lower or no additional fees can significantly reduce the APR. Look for options that minimize or eliminate charges like origination fees, processing fees or prepayment penalties, as these can add up and increase the overall cost of the loan.

Reduce the Loan Term

Shorter loan terms often have lower APRs. While this might increase your monthly payment, it can significantly reduce the total interest paid over the life of the loan.

FAQ About APRs on Personal Loans

It's financially savvy to understand the impact of APRs on your personal loans, as it affects your loan's total cost and monthly repayments. To help clarify common queries, MoneyGeek compiled a list of frequently asked questions.

How is APR different from the interest rate?
Why is the APR important when comparing personal loans?
Does a lower APR always mean a cheaper loan?
Can my credit score affect the APR I'm offered?
Do all lenders calculate APR the same way?
What is considered a high APR for a personal loan?
Are there ways to lower the APR on a personal loan?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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