When applying for a business loan, it's essential to understand the difference between APR vs. interest rates. These two terms can significantly impact how much your loan truly costs. Knowing the distinction can help you choose smarter financing options.
The interest rate is the basic percentage charged by lenders on the principal loan amount. It does not include fees or other borrowing costs. Think of it as the cost you pay to borrow money.
Lenders determine your business loan interest rate based on:
Your credit score
Loan type (e.g., SBA loan, line of credit, term loan)
Market conditions
Loan amount and term
Fixed Rate: Remains the same over the loan's life.
Variable Rate: Changes based on benchmark indexes like the prime rate.
The APR, or annual percentage rate, represents the total cost of borrowing. It includes the interest rate plus any lender fees and additional charges spread over the life of the loan.
APR helps business owners:
Compare loan offers accurately
Understand the full borrowing cost
Avoid hidden fees
Important: While the interest rate shows the borrowing cost, the APR tells you what you’ll actually pay each year.
| Feature | Interest Rate | APR |
|---|---|---|
| Includes fees | No | Yes |
| Shows total loan cost | No | Yes |
| Useful for loan comparison | Limited | Ideal |
| Changes with loan fees | No | Yes |
Both APR and interest rates influence your total loan cost. Failing to understand them can lead to:
Choosing higher-cost financing
Overlooking hidden fees
Inaccurate budget forecasting
To compare multiple loan offers effectively:
Never assume a lower interest rate means a cheaper loan. Always look at the APR.
Multiply the monthly payment by the total number of months to get an overall picture.
Ask lenders to itemize origination fees, prepayment penalties, or service charges.
A loan with a 6% interest rate might sound better than one with 7%. But if the 6% loan has higher fees, its APR could be 9%, making it costlier overall.
Get multiple loan estimates
Review both APR and interest rates
Ask for a breakdown of all fees
Calculate total repayment costs
Consider loan term length
Check for prepayment penalties
Choose based on total cost—not rate alone
For comparisons: APR is more comprehensive.
For negotiation: Focus on reducing the interest rate to lower your overall APR.
For short-term loans: Interest rate may be more relevant, especially if fees are low.
Loan Amount: $100,000
Interest Rate: 6%
Fees: $2,500
APR: 6.85%
Loan Amount: $100,000
Interest Rate: 7%
Fees: $500
APR: 7.2%
Despite the lower interest rate, Example 1 has a higher total cost due to fees.
Yes. APR usually includes fees, so it’s almost always higher than the interest rate.
You can negotiate both. Start with the interest rate and ask about reducing fees to lower APR.
It often makes loans seem cheaper. That’s why comparing APRs is critical.
Interest rate = Cost to borrow money (excluding fees)
APR = Total annual cost of the loan (including fees)
Use APR for accurate comparisons between loan offers
Always review the full loan terms, not just the advertised rate
Understanding the difference between APR vs. interest rates on business loans can save your business thousands of dollars. Don’t just glance at the rate—dig deeper. Compare total costs, understand the fees, and make informed borrowing decisions.
Ready to explore your financing options?
Contact us today for personalized guidance on securing the best business loan for your needs.