Welcome to this video on consumer lending! Today, we're going to dive into the difference between APR and interest rate. Let's start with APR.

APR stands for Annual Percentage Rate. It's a broader measure of the cost of borrowing money than just the interest rate.

APR includes the interest rate plus any other fees or charges associated with the loan.

For example, if a loan has a 7% interest rate and additional fees amounting to 1% of the loan, the APR would be 8%.

Now, let's talk about the interest rate.

The interest rate is the cost you pay each year to borrow money, expressed as a percentage rate.

It does not include fees or any other charges associated with the loan.

Interest rates are influenced by factors such as your credit score, the lender you work with, inflation, and the broader economy.

So, what are the key differences between APR and interest rate?

The interest rate only reflects the cost of borrowing the principal loan amount, while the APR includes the interest rate plus other fees and charges.

This means the APR is always higher than the interest rate.

Why is understanding this difference so important?

When comparing loan offers, it's crucial to compare APRs to get a full picture of the true cost of the financing.

The APR provides a better idea of the total cost of the loan over its life, making it crucial for long-term financial planning.

In conclusion, understanding the difference between APR and interest rate is essential for making informed decisions when borrowing money.

While the interest rate reflects the direct cost of borrowing, the APR provides a more comprehensive view of the total cost, including all associated fees.