The term “annual percentage rate” is commonly used in reference to financial products such as mortgages, credit cards and personal loans.
Broadly speaking, APR is the sum of the interest rate plus extra fees, also known as finance charges, calculated on a yearly basis and expressed as a percentage. If there are no fees, the APR equals the interest rate.
Why APRs are important for personal loans
When you’re shopping for a personal loan, the APR is one of the most important things to consider because it provides an apples-to-apples cost comparison. The interest rate or monthly payment alone do not reflect the true cost of the product.
Personal loans are fixed-rate installment loans, which means your interest rate won't change over the term of the loan, and you pay the loan back in equal, monthly installments. Lenders assign an interest rate based on your credit score, credit report and the ratio of your debt to gross income, among other factors.
» MORE: What is my debt-to-income ratio?
Personal loans may come with an upfront fee — the origination fee — that ranges between 1% and 10% of the loan amount. The fee you're charged also depends on your credit profile.
It pays to shop around at multiple lenders because each lender uses a different formula to calculate APR. Many lenders let you pre-qualify to check your estimated rate without affecting your credit score.
How APRs work
Let’s look at how APR helps you choose a loan. Assume you want to borrow $5,000 and pay it back over four years. You apply with two lenders and are quoted the following rates:
$150 (3% fee)
$100 (2% fee)
At first glance, it’s hard to know which loan is cheaper. One lender offers a lower interest rate but charges a higher fee. The monthly payment is almost equal.
That’s when APR comes in: The first loan has an APR of 11.6% and the second loan has an APR of 12.1%, making the first loan the less expensive option overall.
Now you can confidently compare the total cost of both loans and choose the one that’s right for you. NerdWallet recommends choosing the loan with the lowest APR for a given loan term because it’s always the cheapest option.
In some cases, it can make sense to choose the higher-interest-rate loan — if the monthly payment is more affordable for your budget, for instance, or if the origination fee is lower. Some lenders deduct this fee upfront, so even if you're approved for a $5,000 loan, you may end up getting less than that amount.
Compare APRs for personal loans
Use our personal loan calculator to see your monthly payment and total interest, based on your credit score and desired loan terms. You can also see potential rates from online lenders.
» MORE: Best personal loan rates
What is a good APR for a personal loan?
Borrowers with good to excellent credit scores (690 and higher on the FICO scale) will likely receive the lowest rates. Your credit score isn’t the only factor lenders review on an application, but it’s often an important one.
Here’s what personal loan interest rates look like, on average:
How's your credit?
28.7% (Lowest scores unlikely to qualify.)
Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified in NerdWallet’s lender marketplace between Jan. 1, 2020, and Dec. 31, 2020. Rates are estimates only and not specific to any lender.
Compare loan options to ensure you get the lowest rate. NerdWallet lets you pre-qualify with multiple lenders at one time without affecting your credit score.
If you have bad credit (629 or lower on the FICO scale), you can still qualify for a personal loan. Some lenders work specifically with bad-credit applicants and will consider other factors on your application, like your monthly free cash flow, education or where you live.
» MORE: Compare loans for bad credit
Bad-credit borrowers will likely receive a higher rate. Look for an APR under 36%, which consumer advocates agree is the cap for loan affordability, and make sure the monthly payments fit comfortably in your budget.