When Interest Rates aren’t really Interest Rates: APR vs Simple Interest explained by the Team at LoanU
If you’re considering taking out a car loan or personal loan, or submitting on your customers behalf, it’s very important to know the difference between an APR and an interest rate and being able to compare them, so you can make an informed financial decision that makes sense for you and your client.
The Technical Stuff
First, it’s essential to know the definitions of the terms APR and interest rate.
- APR: APR stands for Annual Percentage Rate. It is generally expressed as a percentage, and it is the annual cost of borrowing money. An APR can include fees like insurance, closing costs, loan initiation costs, and other fees. While you may think that APR and interest rates are the same, they are not.
- Interest Rate: An interest rate, on the other hand, is the annual cost of borrowing money. It is also expressed as a percentage. The interest rate does not include the additional fees that are included in an APR.
How LoanU Can Help
LoanU does not charge risk or equalisation fees like other lenders. This means that whilst our interest rates may be higher, the end customer wins by having lower repayments throughout the life of the loan.
Let’s take a look at an example:
Client was approved at a competing financier for a vehicle invoice of $25,000 at an interest rate of 22%. Their repayments, over 60 months, would have come to $217.62 per week. Client than came to LoanU and was approved for a vehicle invoice of $29,020 at an interest rate of 22.99%. Over 60 months, despite LoanU providing a significant amount higher approval, our repayments came to $216.57.
The Bottom Line
While the interest rate determines the cost of borrowing money, the APR is a more accurate picture of total borrowing cost because it takes into consideration other costs associated with getting a loan.
When determining which loan provider to borrow money from, it is crucial to pay attention to the APR, meaning the real cost of financing.
Taking into account the above example, we clearly see that interest rates only scratch the surface when it comes to the true cost of borrowing.
LoanU offers no risk fees, and lower monthly account keeping fees and with this, puts the borrower into a far better financial position than its competitors.