What are the differences between interest rate and annual percentage rate?

The major differences between interest rate and annual percentage rate are as follows −

Interest rate

• 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.