Difference between interest rate and APR

Factual Questions
1

Lately I’ve been seeing a lot of ads for mortgage companies advertising their low interest rates. They have in big print a low “fixed rate” percentage, then in small print they disclose that the APR is a different rate, usually 1/4 to 1/2% higher than the advertised rate.

I’ve always thought that “interest rate” and “APR” were the same thing. To calculate the amount of a monthly payment that goes toward interest, I’ve always used the formula:

i = Principal Balance * (APR / 365) * Days since last pmt

Can someone explain what the difference is between these two terms? If the “interest rate” is now plugged into this formula instead of APR, how is APR calculated?

Thanks.
FBG

2

APR is fairly useless. It is simply the quoted period’s rate times the number of periods in a year.

Example: 2% monthly would be–>2% x 12 months = 24% APR

It’s uselss because it does not include compound interest.

What you want is the Effective Annual Rate (EAR) or the Annual Percentage Yield (APY), which take compounding into account.

3

The APR includes some, but not all fees, along with the interest rate.

Simply, the APR answers the question - what would be the interest rate with exactly the same cash flows as you have to pay on a loan with the fees.

4

From this site, http://http://www.ny.frb.org/pihome/educator/define.html