What is APR in personal loans?
APR (Annual Percentage Rate) is the overall annual cost of a personal loan, including the interest rate and most mandatory fees, expressed as a percentage.
While the personal loan interest rate indicates only the interest charged on the principal amount, APR provides a broader view of the borrowing cost because it may include other additional charges associated with the personal loan.
These charges typically include processing fees, admin charges, and other applicable costs associated with the loan. Since APR includes these elements, it offers a more realistic view of the effective annual cost of a personal loan.
Understanding the difference between APR and the personal loan interest rate can help borrowers evaluate their tenure and suitable EMI based on the APR and how it suits their current financial circumstances.
What is the personal loan interest rate?
The personal loan interest rate is the percentage charged by the lender on the principal each year. This rate determines the interest part of each EMI during repayment. For example, if a borrower takes a loan of ₹2,00,000 for 3 years at an interest rate of 10% per year, the monthly EMI would be about ₹6,453.
Since the interest rate directly influences the EMI and the overall repayment amount, it is often the most important factor borrowers consider when comparing loan options.
What is APR?
Annual Percentage Rate represents the annualised cost of borrowing. Unlike the personal loan interest rate, the APR includes other loan costs, such as certain additional charges.
These costs typically may include:
- Loan Processing Fee
- Administration Fee
- All and any other applicable costs attached to the loan
For example, if you take a ₹1 lakh personal loan at 10% interest over 1 year, the total interest paid is approximately ₹5,499 on a reducing balance basis. If the lender charges a 2% processing fee and 1% administrative charges, the total borrowing cost increases to ₹8,499. This higher effective cost is what APR reflects.
APR vs personal loan interest rate
Although the two terms are related, they are different and have distinct uses.
| Aspect | Annual Percentage Rate | Personal Loan Interest Rate |
| What it represents | Overall cost of borrowing on an annual basis | Interest charged on the principal amount annually |
| What it includes | Interest plus all other applicable fees | Only interest |
| Use | Helps know the actual cost of the loan | Critical for EMI calculations |
Let us assume that two loans of the same amount offer the exact same personal loan interest rate, but one loan has higher processing fees, so its APR may be higher. This means the total cost of borrowing could be greater even though the interest rate is the same.F
Why APR matters when comparing personal loans
APR can be useful when borrowers are comparing loan offers, as it indicates a more accurate cost of the overall loan.
Knowing the APR may help borrowers:
- Calculate the exact cost of the loan annually
- Compare costs with varying tenures and principal amounts
- Identify any hidden or miscellaneous costs before processing the personal loan application
Borrowers who know their interest rate and APR are well informed to make financially sound decisions that align well with their near-to-medium-term financial goals.
Understanding the true cost of personal loans
To summarise the difference between the personal loan interest rate and the annual percentage rate. The interest rate determines the cost charged on the loan principal and impacts only the EMI calculations. APR, however, includes interest plus additional charges such as processing fees, administrative fees, charges and stamp duty, offering a clearer picture of the overall borrowing cost. Knowing the APR helps borrowers compare loans and understand the true financial impact. It allows applicants to make informed financial decisions based on their current finances.
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