What Is the Interest Rate?
The interest rate is the basic cost of borrowing money, which is the percentage of your loan amount. When you take a personal loan, the bank or NBFC charges you this rate for lending the money. For example, if you borrow ₹1,00,000 at a 12% annual interest rate, you will pay ₹12,000 as interest in one year (excluding other charges).
Interest rates in India usually come in two forms:
- Fixed Interest Rate: Fixed Interest Rate stays the same throughout your loan tenure. For instance, if your personal loan from Zype is at 24% p.a. fixed, your EMI remains constant till repayment ends.
- Floating (Variable) Interest Rate: This changes depending on the repo rate and RBI policies. If interest rates rise, your EMI may increase; if rates fall, you save money.
What Is the Annual Percentage Rate (APR)?
The Annual Percentage Rate (APR) is the total yearly cost of borrowing, expressed as a percentage. Unlike just the interest rate, APR also includes mandatory charges such as processing or administrative fees, giving you a clearer picture of the loan’s true cost. This makes it easier to compare different loan offers fairly. However, do note that APR usually does not cover conditional costs like late payment penalties or prepayment charges. The Annual Percentage Rate (APR) includes the base interest you pay but also additional costs like:
- Loan processing fees
- Administration charges
- Insurance premiums (if bundled with the loan)
For example, let’s say you take a ₹2,00,000 loan at 12% interest, but you also pay ₹4,000 as processing fees. Your APR will be higher than 12% because it reflects both the interest and the fee cost spread over the year.
This is why APR is considered the true cost of borrowing. In India, lenders must disclose all fees, but APR gives you a clearer, apples-to-apples way to compare different loan offers.
APR vs Interest Rate: What’s the Difference?
While both APR (Annual Percentage Rate) and the interest rate describe the cost of borrowing, they are not the same. The interest rate shows only the base cost of the loan, while the APR includes extra charges like processing or administrative fees, giving you the exact cost of borrowing. Here’s a side-by-side look:
Factor | Interest Rate | APR (Annual Percentage Rate) |
Definition | Base cost of borrowing, expressed as a percentage. | Total yearly cost of borrowing, including interest fees. |
What it Covers | Covers only the interest charged by the lender. | Interest plus mandatory charges (processing, admin, etc.). |
Transparency | Shows the minimum borrowing cost. | Gives the complete, accurate picture of loan cost. |
Usefulness | Good for knowing the monthly EMI. | Best for comparing loans across different lenders. |
Amount Shown | Usually lower. | Slightly higher than the interest rate due to added fees. |
The interest rate tells you what you’ll pay as just the interest, while the APR reveals the total cost of the loan. Confusing the two can lead you to choose a loan that looks cheaper but ends up costing more overall. So, ensure to understand the total cost of the loan before you sign any loan.
How APR and Interest Rate Affect Your Personal Loan in India
In India, a higher interest rate results in higher monthly payments and greater total interest paid, while the APR (Annual Percentage Rate) provides a more complete picture of your loan’s total cost, including the interest rate plus all applicable fees and charges like processing fees. For personal loans, APR is the better metric to compare different loan offers and understand the true expense, as it accounts for hidden charges that the nominal interest rate doesn’t.
Let’s make this practical with an example:
- Loan A: ₹1,00,000 at 12% interest, no processing fee.
- Loan B: ₹1,00,000 at 11% interest, but with a 3% (₹3,000) processing fee.
At first glance, Loan B looks cheaper because the rate is lower. But once you add the processing fee into the calculation, its APR is higher than Loan A. This means you may end up paying more, even with a lower stated interest rate.
In India, the RBI requires lenders to disclose charges clearly. And, comparing APR is the safest way to know the true cost before committing.
Why Is APR More Important for Loan Comparison?
When you’re comparing personal loans, the APR gives you the exact cost of your loan. While the interest rate tells you how much you’ll pay in interest, the APR includes processing fees, admin charges, or even bundled insurance, so you don’t get any surprises later.
Here’s why APR matters:
- Lets you compare different lenders fairly, beyond just interest rates.
- Uncovers hidden costs that might make a “low-rate” loan more expensive.
- Gives you the total borrowing cost upfront, avoiding expensive surprises later.
- Helps you pick wisely when two loans look similar on paper but differ in fees.
Whenever you’re browsing personal loan offers online, don’t just look at the interest rate; check the APR. It’s the true measure of affordability when comparing different loans online.
Also Read: How to Choose Best Personal Loan Lender – Top 8 Reasons
How Are Interest Rate and APR Calculated?
An interest rate is a percentage of a loan’s principal that you pay to the lender. The Annual Percentage Rate (APR), on the other hand, represents the total cost of a loan expressed as a yearly percentage, and includes the interest rate plus any additional loan fees.
To calculate the interest rate, use the formula below:
- Simple Interest Formula: (Principal × Rate × Time) ÷ 100
- Example: On ₹1,00,000 at 12% for 1 year = ₹12,000 interest.
To calculate the APR (Annual Percentage Rate), follow these steps:
- Step 1: Add all loan-related costs (interest + processing fee + admin charges).
- Step 2: Spread these costs over the loan term.
- Step 3: Convert into an annualized percentage.
Example: If you take a ₹1,00,000 loan at 12% interest with a ₹2,000 processing fee, your APR will be a bit higher than just the loan at 12%. That’s because APR adds the fee cost, giving you the exact picture of what you’ll actually pay. This makes APR a more realistic reflection of what you’re truly paying.
Common Fees Included in APR but Not in Interest Rate
When lenders advertise just the interest rate, it can look cheaper than it really is because several extra costs are left out. The APR gives you a clearer picture by including most of these mandatory charges:
- Processing Fees (1–3%): A one-time cost deducted from the loan amount when it’s disbursed.
- Documentation Charges: A small fee is charged for KYC verification and paperwork.
- Insurance Premiums: If the lender bundles a loan protection policy with your loan.
- Admin or Service Fees: Sometimes added by NBFCs and digital lenders for account handling.
What’s not included: Conditional costs like late payment penalties, cheque bounce charges, or prepayment fees. These are avoidable if you pay on time or choose not to prepay.
By looking at the APR, you know the true cost of borrowing upfront, instead of getting surprised by hidden charges later.
Tips to Lower Your Personal Loan APR and Interest Rate
Getting a personal loan is easy today, but keeping borrowing costs low requires some planning. The good news is that with a few smart steps, you can lower both your APR and interest rate, making your loan more affordable.
Here Are Some Proven Tips:
- Maintain a High Credit Score (750+): A good CIBIL score signals that you’re a reliable borrower. Lenders reward this with lower interest rates and fewer add-on charges.
- Compare Lenders Before Applying: Don’t settle on the first offer. Check banks, NBFCs, and digital platforms like Zype. Even a small difference in APR can save you thousands over the loan tenure.
- Negotiate the Processing Fee: Many lenders are open to waiving or reducing processing fees, especially if you have a strong credit history or an existing relationship with them.
- Choose the Right Loan Tenure: Longer tenures reduce EMI but increase total interest cost. Shorter tenures may have higher EMIs but lower overall APR. Select the tenure based on your repayment ability.
- Prepay or Foreclose Smartly: If the lender allows prepayment or foreclosure without heavy penalties, making part-prepayments reduces your outstanding balance and interest burden. Always check prepayment terms before signing.
- Avoid Add-On Products You Don’t Need: Sometimes lenders bundle insurance or extra services that raise your APR. Opt only for what’s essential.
- Apply With Stable Income Proof: Having consistent income (salary slips, bank statements, or GST returns for self-employed) strengthens your profile and helps you qualify for better terms.
Small measures like improving your credit score and comparing APRs go a long way in lowering your borrowing costs and making your personal loan stress-free.
Conclusion
While both the interest rate and APR are important, they highlight different aspects of borrowing. The interest rate shows the basic cost of the loan, but the APR gives you the full picture by adding in processing fees and other charges. If you’re comparing personal loans, focus on the APR as it’s the most accurate way to understand the true cost and choose the loan that best fits your budget.
Frequently Asked Questions
Interest rate is the percentage charged on just the loan principal, while APR is the all-in yearly cost (interest plus mandatory fees like processing/documentation). Use APR to compare lenders as it reflects exact borrowing cost and helps you pick the best deal.
No. APR cannot be lower than the stated interest rate because it adds mandatory costs (e.g., processing/admin/insurance) to the interest, charged annually. So APR ≥ interest rate. They’re equal only when all fees are zero or fully waived.
EMIs are computed using the loan’s interest rate (with principal and tenure), not the APR. Use the interest rate to estimate your monthly payment, and use APR only to compare overall loan costs across lenders.
Yes. Under RBI’s transparency rules, lenders must include all mandatory upfront charges (e.g., origination/processing, admin, bundled insurance) in the disclosed APR. Always review the Key Fact Statement (KFS) to see fees itemized and compare loan offers fairly.
RBI requires lenders to disclose an all-inclusive APR in the Key Fact Statement for retail/MSME and digital loans, covering interest plus mandatory fees (processing/admin/linked insurance) and excluding contingent penalties like late fees. This standardisation improves transparency and comparability, so borrowers can judge the true cost across lenders.
Yes. APR matters for all loans because it shows the all-in yearly cost, letting you compare offers fairly. In India, regulated lenders disclose the all-inclusive annual cost/APR in the RBI-mandated Key Fact Statement, enabling transparent, like-for-like comparisons.
