1. Money
Send to a Friend via Email

The Difference Between the Stated Interest Rate and the Annual Percentage Rate

The Effect of Compound Interest

By

Bank loans carry two interest rates, the stated or nominal interest rate and the effective interest rate or annual percentage rate (APR). The stated interest rate is just what it says. It is the simple interest rate that the bank gives you as the interest rate on the loan. This interest rate does not take the effect of compound interest into account.

The annual percentage rate is the actual amount you pay to borrow the money or the rent on the money you borrow. The APR, also called the effective interest rate, takes the effect of compound interest into account.

The APR is higher than the stated interest rate unless compound interest is not involved. If you take out a simple interest loan and pay the entire loan off at the end of some time period, then the APR and stated rate are the same. However, if you take out an installment loan, for example, the APR is considerably higher than the stated interest rate.

Here are examples of the differences between the APR and the stated interest rate on term types of bank loans:

©2014 About.com. All rights reserved.