# What should people know about the difference between APR and interest rates when they compare personal loans?

Annual Percentage Rates, or APR rates that are presented in all financial documents represent the annual interest rate an individual is expected to pay if and only if the loan is compounded once per year. However, single annual compounding is rarely ever the case. Most interest on loans is compounded monthly and in the cases of credit cards, interest is compounded daily. This does not mean that the borrower will be paying the APR rate multiple times per year. What this means is that the borrower will be paying the Period Interest Rate, which is the APR rate divided by the number of compounding periods. The more compounding periods per year, the more times Periodic Interest is assessed. While the periodic rate appears lower, there is a cumulative effect of interest being compounded. Hence, the borrower will always be paying more than the stated APR rate when annualized. In fact, they will be paying what we call the EAR or Effective Annual Rate. The formula for the EAR is [(1+ APR/Compounding periods per year)^(compounding periods per year) - 1]. So, if an individual secures a personal loan with a 10% APR that compounds monthly (i.e., 12 times per year), they are really paying 10.47% annually [(1+0.10/12)^12 - 1].

**Answers by**Augusta University