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The term “annual percentage rate” is commonly used in reference to financial products such as mortgages, credit cards and personal loans.
Specifically for personal loans, APR is the sum of the interest rate plus origination fees 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 personal loans, the APR provides an apples-to-apples cost comparison. The interest rate or monthly payment alone does not reflect the true cost of the loan.
Personal loans are fixed-rate installment loans, meaning your interest rate won't change over the loan term, and you pay the loan back in equal, monthly installments. Lenders assign an interest rate based on your credit score, credit history and your debt-to-income ratio, among other factors.
» MORE: What is my debt-to-income ratio?
Personal loans may come with an upfront origination fee ranging between 1% and 10% of the loan amount. Lenders consider factors like credit score, loan amount and income when calculating the fee.
It pays to shop around at multiple lenders because each lender could use a different formula to calculate APR. Many online lenders and some banks and credit unions let you pre-qualify to check your estimated rate without affecting your credit score.
How APRs work
Let’s see how APR helps you choose a loan. Assume you want to borrow $5,000 and repay it over four years. You pre-qualify with two lenders and receive the following rates:
$150 (3% fee).
$100 (2% fee).
Initially, 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% and higher total interest, 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.
Impact of simple and compound interest on APRs
Personal loan lenders typically charge simple interest. A simple interest rate is calculated solely on the principal loan amount and remains fixed for the life of the loan.
For example, a $5,000 loan with a simple interest charge of 15% would have a fixed monthly payment of $173 over a three-year term.
Interest costs on installment loans are typically less than credit card APRs that charge compound interest, which is interest on the principal plus any unpaid interest.
Compare APRs for personal loans
Typically, personal loan APRs are between 6% and 36%. 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.
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?
25.3% (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 from July 1, 2020, to July 31, 2021. Rates are estimates only and not specific to any lender.
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.
Compare loan options to find the lowest rate. NerdWallet lets you pre-qualify with multiple lenders at one time without affecting your credit score.