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Why is my personal loan APR different than the interest rate?

Your personal loan interest rate is commonly referred to as APR, but here's a look at why the two numbers are not always the same.

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Taking out a personal loan can sometimes feel like a whirlwind.

Between submitting your information for a soft pull (otherwise known as getting prequalified) and evaluating loan offers to choose the best one, it's easy to overlook the many personal loan fees that can get tacked onto the money you borrow.

Just like any kind of loan or credit product, personal loans come with interest charges. And that interest is colloquially known as APR. Most consumers understand that APR and interest are two financial terms often used interchangeably, when in fact their meanings differ slightly.

Ahead, CNBC Select explains and why your interest rate may be different than your overall APR.

What is interest on a personal loan?

Personal loan lenders charge interest rates ranging between roughly 5.99% to upwards of 29% (and sometimes higher). The average personal loan interest rate for two-year loans is currently 11.23% according to the latest data from the Federal Reserve.

Interest rates are expressed as a percentage applied to your remaining monthly balance. The rate determines how much you pay to borrow money over the lifetime of the loan. A two-year loan, for instance, gets paid back over a period of 24 monthly installments. Each month, a portion of your payment gets applied to the balance you still owe, while another percentage gets applied toward interest, or the fee you pay to borrow.

Interest rates can be fixed (stay the same for the life of the loan) or variable (subject to change from month to month).

What is APR on a personal loan?

At a first glance, it's easy to confuse the annual percentage rate (APR) on a personal loan with its interest rate.

However, APR refers to the annual cost you pay in total, including both the interest rate and any fees associated with the loan, specifically origination fees and/or one-time administration fees.

When there are no extra fees, the APR is the same as the interest rate. However, many lenders charge origination fees ranging from 2% to 10%. Such fees won't change your interest rate, but they do add to the loan's total cost.

So the advertised APR may include both interest rates and other fees. It's important to do your research ahead of time to make sure you understand exactly what your loan will cost.

APR and interest comparison

Here's an example of a loan with both an origination fee and monthly interest rate.

If you took out a $10,000 loan that had an 8% origination fee, your lender would charge $800 upfront before even giving you the money. When the money is deposited into your account, you'd only get $9,200. You'd still owe back the full $10,000, plus interest.

Let's assume the interest rate is 9.46% and your repayment term is four years (48 months). According to Experian's APR calculator, the total APR would actually be considerably higher than the interest rate, at 13.10%, because you have to factor in the origination fee.

  • Total loan amount: $10,000
  • Origination fee: $800
  • Amount deposited to your bank account: $9,200
  • Interest rate: 9.46%
  • APR: 13.10%
  • Estimated monthly payment: $248.85
  • Total interest paid over life of the loan: $1,944.82
  • Total paid (interest + fees): $2,744.82

How to get a personal loan

It's obviously best to avoid origination fees whenever possible. That's easier to do when you have good to excellent credit score, since you'll qualify for better options.

None of the loans on our best personal loan list charge origination fees. They include:

To learn more about what to consider before taking out a personal loan, check out our list of 10 questions everyone should ask before they apply.

Compare interest rates to get the best personal loan

CNBC Select now has a widget where you can easily compare several personal loan offers to make sure you're getting the best rates:

This tool is provided and powered by Engine by Moneylion, a search and comparison engine that matches you with third-party lenders. Any information you provide is given directly to Engine by Moneylion and it may use this information in accordance with its own privacy policies and terms of service. By submitting your information, you agree to receive emails from Engine by Moneylion. Select does not control and is not responsible for third party policies or practices, nor does Select have access to any data you provide. Select may receive an affiliate commission from partner offers in the Engine by Moneylion tool. The commission does not influence the selection in order of offers.

Your personal loan APR will be decided based on your credit score, credit history and income, as well as other factors like the loan's size and term. Once you're able to review a few offers and compare rates and fees, you can feel confident that you're ready to sign-up for a personal loan.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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