Interest & APR
Understand how interest rates and APR work and how they affect the total cost of borrowing.
Calculate Your SavingsWhat is Interest?
Interest is the cost of borrowing money. When you borrow money from a lender, they charge you interest as compensation for lending you the funds and taking on the risk that you might not repay.
Interest can be calculated in different ways:
- Simple Interest: Calculated only on the principal amount; rarely used today
- Compound Interest: Calculated on principal plus previously earned interest; most common
- Daily Compound: Interest compounds daily, meaning you pay interest on interest daily
Understanding APR
APR (Annual Percentage Rate) is the total annual cost of borrowing money, expressed as a percentage. Unlike the interest rate alone, APR includes the interest rate plus any fees, points, and other costs associated with borrowing.
This makes APR a better way to compare loans because it gives you a more complete picture of the true cost of borrowing.
Example: Interest Rate vs. APR
How Interest Affects Total Cost
Short-Term Impact
With a 5% APR, on a $10,000 loan with a 5-year term, you would pay approximately $1,375 in interest.
Total paid: ~$11,375
Longer-Term Impact
The same $10,000 at 5% over 10 years would cost approximately $2,750 in interest.
Total paid: ~$12,750
Higher APR Impact
The same $10,000 at 15% over 5 years would cost approximately $4,150 in interest.
Total paid: ~$14,150
Tips for Getting Lower Interest Rates
Improve Your Credit Score
Higher credit scores qualify for lower APRs. Work on building excellent credit.
Shop Around
Compare APRs from multiple lenders. Different lenders offer different rates.
Put Down a Larger Down Payment
Reducing the amount you borrow can help you qualify for better rates.
Consider Secured Loans
Loans backed by collateral typically have lower APRs than unsecured loans.
See How Interest Affects Your Situation
Use our calculator to see how different interest rates impact your total cost of borrowing.