At a Glance

During the course of your search for a loan, it’s likely you came across the term “annual percentage rate”. An APR loan is extremely common, so it’s important to learn what exactly this type of loan is and how to find the best APR possible.

What is annual percentage rate (APR)?

In short, a personal loan APR, or annualized percentage rate, is the total yearly interest generated by a predetermined sum charged by a loan lender. This value is initially expressed as a percentage value when you are looking at various loan offers, and it includes all potential fees or other costs. It’s best to think of an APR as a bottom-line number for what a borrower is charged on top of the sum of money they are borrowing.

How annual percentage rates work?

As mentioned, annual percentage rates take yearly interest into account, but they also factor in many other items, such as fees. When going to borrow a loan, assume you may be offered an interest rate of 12% and 13% by two different lenders. The listed APRs for these loans are 15.2% and 13.6% respectively. Initially, you would assume that you should choose the 12% option as it would be cheaper, but this would be a mistake.

Since APR broadly encompasses all costs that will be passed on to a borrower, the lower APR is always the cheapest option. In this situation, assuming the monthly payments are reasonable, the 13% offer would actually likely be the smarter choice.

Why APRs are important for personal loans?

The importance of an annualized percentage rate is that it is the only way to measure the true cost of the loan you are borrowing. Monthly payments, interest rates, and fees do not give you the true total on their own, but APRs take all of these factors into consideration with their rate. Interest rates are assigned based on factors such as your credit score, credit history, income level, and more. APRs, however, are simply calculated based on all the costs that will exist with the loan.

Types of APRs

Depending on what is being borrowed and the type of interest rate a lender offers, there are different types of APRs you may see. For example, credit card APRs will often vary depending on the type of charge. Cash advances, purchases, and balance transfers may all carry different APRs even though they are associated with the same card. Additionally, you may see a 0% introductory APR offered to new customers as a way of enticing them to sign up for the credit card.

Annual percentage rate on personal loans can vary between fixed and variable. A fixed APR is one that has a fixed interest rate, meaning the rate will not change for the entirety of the loan life. On the other hand, a variable APR is associated with a variable interest rate, meaning an interest rate that can change at any time.

What is a good APR for a personal loan?

Answering the question of what’s a good APR on a personal loan can be challenging as the answer will vary depending on your specific financial and personal situation. However, as a general rule of thumb, the following table can lay out what to expect:

Credit Status Score Range Estimated APR
Excellent 720-850 10.5%
Good 690-719 15.5%
Fair 630-689 20.8%
Bad 300-629 26.1%

Related: Personal Loans for Bad Credit | Credello

How to calculate annual percentage rate on a loan?

Calculating the cost of borrowing money on an annual basis can be a challenge due to the number of factors that go into it, however there is a general formula you can follow:

APR=(((Fees+Interest)/Principal)/n )×365)×100

In the above equation, the variables are equal to:

  • Interest: Total interest sum paid over the life of the loan
  • Principal: Loan amount
  • n = Number of days in the loan term

As you can see, depending on the variables of your specific loan offer, the APR amount can vary. Additionally, factors within the numerator can also vary, such as the interest rate, depending on your credit score and other items.

How to compare APR for personal loans?

Average annual percentage rate for personal loans can vary greatly depending on the factors within the calculation, but they generally fall between 6-36%. Naturally, you will want to find a good APR for personal loans, rather than a sky-high percentage. To receive the lowest APR personal loan offer, you will need to have strong credit, a strong source of income, and other factors. When comparing your various offers, it’s best to use a personal loan calculator to see what you can expect to owe:

Top lenders for low APR personal loans include, but are not limited to:

  • SoFi
  • Marcus by Goldman Sachs
  • Discover – Personal Loans
  • LightStream

Be sure to compare all potential offers when looking for a low APR personal loan to help ensure you are receiving the best deal.

How to get a great APR on a personal loan

Getting a great annual percentage rate on a personal loan is about more than getting lucky with who the lender is. There are a number of crucial factors that go into the APR calculation and bettering those numbers should be at the top of your mind. Low APR personal loans online can be hard to come by, but be sure to have the following in place:

  • Strong credit score: The higher your credit score, the more likely it is that you will be offered a favorable interest rate. By extension, your APR would then be lower as well.
  • Provable stream(s) of income: Being able to provide proof of income is a major step in the right direction towards receiving a better rate.
  • Pay down your existing debts: For a better chance at a low APR, pay down existing debts you have before applying for the loan. This will improve your debt-to-income ratio.


In short, an interest rate is what you are charged yearly for borrowing the money of the loan, but it is only interest. The APR is the all-in price that factors interest, fees, and other costs into the percentage. The easiest way to think of it is that the interest rate is just a portion of the cost, whereas the APR accounts for all costs.

While you would certainly be forgiven for confusing APR and APY, they are different. APR has been outlined above, but APY (annual percentage yield) is a similar, albeit more complicated, topic. While APR factors simple interest into its equation, APY factors compound interest. Say you have a $500 loan that compounds monthly, with a 1% monthly interest rate. At the end of the month, the balance would be $505. While APR would only assess interest on top of $500, APY assesses interest on the entire $505, making APY the higher percentage rate.

To get a personal loan, first evaluate your financials to determine the exact loan amount you need. Gather all pertinent information for the application such as credit history, proof of residence and income, and other documents. Research different lenders in your area, such as online lenders vs. banks. Submit an application and wait for the result.

Read more: How to Get a Personal Loan