Personal loans can help you easily access funds, which can be used for a variety of reasons. If you’re determining whether a personal loan is right for you, you’ll need to consider the Annual Percentage Rate—the APR—of the loan.
APR refers to the annual interest rate charged for your personal loan. Actual APR numbers range from about 3.5% to a maximum of 35.99%, though typical APRs will often fall between 5% and 30%. The APR of your loan is determined based on a variety of factors including loan amount, term length, credit score, income, and financial history.
In addition to APR, many personal loan providers also charge a small one-time loan fee which will raise the actual APR number slightly.
So if, for example, you took a personal loan of $10,000 for 5 years, with an APR of 8% and $60 in associated fees, your monthly payback would be $202.76 and the real APR would be closer to 8.3%
When applying for a personal loan online, you will often be presented with several options with varying APRs and term lengths. A lower APR does not necessarily mean a cheaper loan, as it may carry a longer term.
Let’s take the above example and take a look at what happens when you lower the credit score but increase the term length. In the above example, a $10,000 loan with an actual APR of 8.3% had a monthly payback of $202.76 for 5 years. Total repayment in this example would be $12,225.84 which includes associated fees.
If we dropped the theoretical APR to 7.2% but increased the term to 8 years, monthly payback would drop to $136.34 but the actual repayment of the loan would cost $3,148.37 instead of $2,225.84 in the previous example. This is a difference of almost $1000 and shows just how important it is to compare APRs and term lengths.
Joe Schwartz | Loans Editor