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Difference Between APR and Interest

What is the Difference Between APR and Interest for an Earnest Client?

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Absolutely nothing.

At Earnest, there is no difference between the Interest Rate and the APR of your loan. Why is that remarkable? Simply put, it means we are going back to the basics.

Several decades ago, the federal government began requiring that lenders disclose an Annual Percentage Rate, or APR, as a simple way to compare loans of the same type. It essentially prevents banks and lenders from quoting you an interest rate that seems low, but does not include additional fees. For example, a lender may charge you an origination fee to create your loan, transaction fees to process each of your payments, or teaser rates that jump up if you miss payments, causing your effective interest rate to be much higher.

You could receive an offer for a 9% loan with an origination fee of 3%, and another loan at 10% with no origination fee. The lower interest rate loan has an APR of 12% when you factor in the extra fee, while the higher interest loan with no added fee has the lower APR of 10%. In this case, the “higher” interest loan is actually a better choice than the “lower” interest rate loan.

So what happens when a lender charges no additional fees?

Interest rates and APRs become the same.

Take Earnest, for example. We don’t believe in charging extra fees simply because we evaluated your creditworthiness. With an Earnest loan, you pay back nothing but the principal and interest.

We believe fairness and transparency are values that are fundamental to finance. By equating APR with the true interest rate, we can express and share these values in a way that benefits our clients.

Here’s to being honest.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.