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.