Loan Education
Guide to Understanding Loan Interest Rates and Fees
The interest rate is the yearly cost of borrowing the principal; the APR adds certain fees to show a more complete yearly cost. When comparing loans of the same amount and term, the one with the lower APR generally costs less overall.
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Interest rate vs. APR
- Interest rate: the percentage charged on your outstanding balance each year.
- APR (annual percentage rate): includes the interest rate plus certain required fees, such as origination fees, expressed as a yearly rate.
Under the federal Truth in Lending Act, lenders must disclose the APR, which makes comparisons easier.
Fixed vs. variable rates
| Fixed rate | Variable rate | |
|---|---|---|
| Changes? | No | Can rise or fall with a benchmark index |
| Payment | Predictable | Can change |
| Typical products | Most personal loans, many mortgages and auto loans | Credit cards, HELOCs, adjustable-rate mortgages, some private student loans |
How amortization works
With an installment loan, each payment covers that month's interest first; the rest reduces the principal. Early on, more of your payment goes to interest. As the balance falls, more goes to principal.
Example: A $10,000 loan at 10% APR over 36 months has a payment of about $323. Total paid: about $11,616, so roughly $1,616 is interest. The same loan over 60 months has a lower payment of about $212, but total interest rises to about $2,748.
Try your own numbers in the Loan Comparison Tool.
Common loan fees
| Fee | What it is |
|---|---|
| Origination fee | Charged for processing the loan; often deducted from the amount you receive |
| Late fee | Charged when a payment is late |
| Returned payment fee | Charged if a payment bounces |
| Prepayment penalty | Charged for paying off early — avoid loans that have one if possible |
| Application fee | Uncommon for personal loans; be cautious if required upfront |
How origination fees affect you
If you borrow $10,000 with a 5% origination fee deducted upfront, you receive $9,500 but repay the full $10,000 plus interest. If you need exactly $10,000, you'd have to borrow more.
What determines the rate you're offered
- Credit score and history
- Debt-to-income ratio
- Loan term and amount
- Whether the loan is secured
- General interest-rate environment
Tips for getting a lower rate
- Improve your credit before applying — see Tips for Improving Your Credit Score.
- Choose the shortest term you can comfortably afford.
- Compare offers from banks, credit unions and online lenders.
- Ask about autopay discounts.
For the bigger picture, read Understanding Personal Loans.