APR vs interest rate: what actually costs you money
The single most expensive mistake Loanplaced advisors see is borrowers comparing interest rate instead of APR. Two loans with identical rates can differ by thousands over the term. Here's why — and how to spot the difference before you sign.
Interest rate is what the lender advertises. APR is what you actually pay.
The interest rate is the cost of borrowing the principal, expressed as an annual percentage. The APR (Annual Percentage Rate) is the interest rate plus mandatory fees (origination, points, sometimes closing costs) expressed as a single annualized number. Federal law (the Truth in Lending Act) requires lenders to disclose APR — because it's the more honest number.
A $20,000 example that changes the answer
Two personal loan offers, both advertised at "11.99% rate":
| Lender | Interest rate | Origination fee | Actual APR | Total cost over 60 months |
|---|---|---|---|---|
| Lender A | 11.99% | 0% | 11.99% | $6,673 |
| Lender B | 11.99% | 6% ($1,200) | ≈15.05% | $7,491 |
| Loanplaced difference | — | — | 3.06 pts | $818 |
Same "11.99% rate" — but Lender B costs $818 more because the origination fee is baked into your effective APR. Every Loanplaced offer page shows both interest rate and APR, side by side, so this comparison happens automatically.
The four fees that push APR above the rate
- Origination fee. Deducted from the loan proceeds. On a $20K loan with a 6% fee, you receive $18,800 but pay interest on the full $20K.
- Discount points (mortgages). Prepaid interest — 1 point costs 1% of the loan amount to lower the rate.
- Mortgage insurance (FHA, some conventional). Ongoing monthly fee that raises effective APR.
- Application/processing fees. Common on business loans and some mortgages.
Why lenders keep advertising rate instead of APR
Because rate is always the lower number. A lender showing "6.99% APR" next to a competitor showing "6.75% rate" looks worse — even if the lender's APR is actually 6.99% and the competitor's is 7.85% after fees. This is why Loanplaced offer pages lead with APR, not rate.
When rate matters more than APR
One edge case: if you plan to pay the loan off early (within the first 12–24 months), the origination fee is front-loaded. You pay it once regardless. A 6% origination fee on a loan you pay off in 12 months is much more punishing than the same fee on a 60-month loan. Loanplaced advisors model both scenarios if you tell us your expected payoff timeline.