Interest Rate versus APR: What's the difference?

When applying for a solar loan, you may encounter the words "interest rate" or "APR". These two are not the same thing.

What is an interest rate?

Your interest rate is the percentage you pay to borrow money from a lender for a specific period of time. This number is fixed throughout the life of your loan.

You’ll always see your interest rate expressed as a percentage. You’re responsible for paying back the initial amount you borrow (your principal) plus any interest that accumulates on your loan.

For example: Assume you borrow $10,000 for your solar panels, and your interest rate is 4%. This means that at the start of your loan, your loan builds 4% in interest every year. That’s $400 annually, or about $33.33 a month.

Your principal balance is high at the beginning of your loan term, and you’ll pay more money toward interest as a result. However, as you chip away at your principal through monthly payments, you owe less in interest and a higher percentage of your payment goes toward your principal. This process is called amortization.

What is APR?

APR stands for “annual percentage rate.” Your APR includes your interest rate as well as additional fees and expenses associated with taking out your loan, such as closing costs.

APR can vary depending on the size of the loan (which can change the closing costs).

What's the difference?

The main difference between interest rate and APR is that interest rate represents the cost you’ll pay each year to borrow money, while APR is a more extensive measure of the cost to borrow money that takes additional fees into account. Since APR includes your interest rate and other fees connected with your loan, your APR will reflect a higher number than your interest rate. You can also consider APR to be your effective rate of interest.