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What are the differences between interest rate and annual percentage rate?
The major differences between interest rate and annual percentage rate are as follows −
It is used to calculate monthly payments/EMIs of loans.
It relates to cost of borrowing.
The formula to calculate the interest rate is as follows − A = P(1+rt), where, A implies simple interest, P for principle amount, r for interest rate, t is time period.
It impacts outstanding debt amount.
The high interest rates are preferred.
Annual percentage rate
It provides full information on principle amount which reflects cost of loan.
It relates to total cost of loan.
The formula to calculate annual percentage rate is as follows − Annual percentage rate = (financial charges/loan amount)*365*100
Less annual percentage rates imply less payments.
Annual percentage rates are/maybe higher for borrows, lower for lenders.
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