Interest rate vs. APR
The interest rate is the cost of borrowing the principal. The APR (annual percentage rate) folds in additional costs like origination fees, giving a more complete picture of what the loan actually costs per year. Two loans with the same interest rate can have meaningfully different APRs once fees are included.
Origination fees
Many personal loans charge an origination fee, often a percentage of the loan deducted before you receive the funds. If you need a specific amount in hand, you may need to borrow slightly more than that amount to net the right total after the fee.
When a personal loan beats a credit card
| Personal loan | Credit card |
|---|---|
| Fixed rate and fixed payoff date | Variable rate, revolving balance |
| Often lower rate for good credit | Convenient but rate can be high if carried |
| Best for: known, one-time expenses | Best for: short-term or ongoing flexible spending |
Consolidating high-interest credit card debt into a fixed-rate personal loan is one of the more common, legitimate uses — as long as the new monthly payment is manageable and the old cards aren't immediately run back up.
Common mistakes
- Comparing only the interest rate and missing the origination fee
- Taking the longest available term without checking total interest paid over the life of the loan
- Using a personal loan for ongoing expenses rather than a one-time, defined cost