The annual percentage rate or APR is one of the most important factors to take into account when applying for a personal loan, as this will help you determine the overall cost of the loan. This figure, expressed as a percentage, can vary significantly depending on the lender you choose, your loan amount, credit score and income, among other factors.

Personal loan APRs: Explained

The APR, or annual percentage rate, is a percentage that represents the total amount of interest and fees you’ll pay over each year for any amount borrowed. This figure is used to compare the cost of borrowing of different financial products, including personal loans, auto loans, mortgages and credit cards.

When comparing personal loan offers, the APR is probably the most important factor to take into account, as it will help you determine how much the loan will cost you, in addition to how much you’ll pay each month.

How the APR for a personal loan is calculated

To calculate the APR, lenders take the interest rate for a personal loan and add in the finance charges, which include origination fees and any other administrative fees. That’s why it’s important to look at the APR instead of just the interest rate when taking out a personal loan, as this number represents the real cost of borrowing.

Luckily, most lenders already have the APR listed on their sites. If you still want to crunch the numbers, you can do so by following these steps:

  1. Add the loan’s interest rate and fees.
  2. Divide that figure by your original loan amount or principal balance.
  3. Then, divide the resulting figure by the number of days in your loan’s term.
  4. Multiply that figure by 365.
  5. Finally, multiply that figure by 100 to turn that number into a percentage.

You can also use a loan calculator to get this percentage if you want to keep calculations simpler.

How APR is different from interest rate

While APR and interest rate are sometimes used interchangeably, there’s a big difference between the two. The interest rate is the cost of borrowing money expressed as a percentage, while the APR includes all the costs associated with borrowing, such as the interest rate, fees and other charges, which is why this figure is often higher than the interest rate.

If a lender doesn’t charge any additional fees, the APR will be the same as the interest rate — but no-fee loans are very rare.

What is a good APR on a personal loan?

APRs can vary based on a variety of factors, including your loan amount, the loan’s term length, your credit score, annual income and debt-to-income ratio. APRs for personal loans can range from around 6 percent to 36 percent, with those with higher credit scores receiving the lowest rates.

According to a Bankrate study, the average APR for a personal loan is 10.6 percent, as of Feb. 1, 2023. But if your credit score is 740 or higher, you could get a much lower APR than that.

Keep in mind that when shopping for a loan, you’ll want to compare other benefits and factors beyond the APR to ensure the loan will suit your needs. Unemployment protection, discounts and a wide range of customer service hours are among some of the additional features you should look for.

How to get the best APR on your personal loan

When shopping for a personal loan, you might notice that the APRs offered vary significantly by lender. And, even with excellent credit, it’s still possible to not qualify for the lowest rates. That is because in addition to your financials, lenders take into account loan amounts, the length of your repayment period and your loan purpose to determine your rate.

That said, good credit, a low debt-to-income ratio and a stable source of income are still the key elements to securing the best offer. You’ll also want to get the loan from a lender that charges fewer fees than the competition and offers rate discounts, as both can help you qualify for an even lower rate.

How to compare personal loan rates

The APR can help you get a sense of what your loan will cost, but it’s just one of many factors to consider when you’re comparing personal loan offers.

Loan terms

After reviewing the lenders’ APRs, consider the loan terms. The APR will likely be different based on the term length. Compare terms to see which lender offers the better overall deal.

Additionally, the length of your repayment term will influence how much you’ll pay each month. Longer terms lead to a lower monthly bill, but also to more interest paid over the life of the loan.

Fees

Lenders may charge fees in addition to interest. Origination fees usually range between 1 percent to 10 percent, for example. Also look for fees that may sneak up on you, such as late fees and prepayment penalties.

Eligibility

Note that lenders may have eligibility criteria beyond the basic credit score and income requirements. Some lenders only serve customers in certain states, for instance, while others only offer personal loans to those looking to consolidate debt.

Additional features

Lastly, look at other features that might make your borrowing experience smoother. These include easy online applications, preapproval tools, a range of customer service hours, discounts and unemployment protection.