by Lauren Rosales-Shepard, Content Writer

So, you’re in the market for a loan. You know it’s important to do your research and shop around. While you’re undertaking that research, though, and doing that shopping, you continuously encounter interest rates and APR. What’s the difference? And what do they really mean, functionally, for your budget, your spending?

As you’re probably aware, an interest rate is the proportion of a loan charged to you, the borrower; it’s typically articulated as an annual percentage of the loan outstanding. When you take out a loan, you ultimately pay back the amount that you borrow, plus the interest–usually in the format of monthly payments. Interest rates can be fixed (which is exactly what it sounds like; the rate does not change), or variable (the rate can change, based on market conditions).

APR is the acronym for “Annual Percentage Rate.” Essentially, it’s meant to represent the total annual cost of a loan, from the interest to the portion of the principal being paid, as well as fees. There’s a typical equation used to calculate APR:

(((Interest charges + fees) ÷ Loan amount) ÷ Number of days in loan term x 365) x 100

But–good heavens!--that’s a lot to process. The Truth in Lending Act requires lenders to do the calculation for you, and to disclose it whenever they offer you credit, or even display an interest rate. The idea is that an interest rate doesn’t tell the whole story, and consumers are therefore protected against being surprised by any extra fees.

That’s all well and good. But, you might ask, how much am I actually going to pay?

Limitations of APR

First thing’s first, APR isn’t perfect. The lenders have a fair amount of leeway when it comes to selecting the fees to include in its calculation. You may be missing any fees from appraisals or titles, to credit reports or document preparation. Plus, APRs were largely designed for longer-term loans, like a first mortgage. As you might imagine, the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of 7 to 10 years. APR also might not accurately reflect your actual repayment behavior. Because it assumes a “standard” repayment plan, if a borrower should make extra payments, or perhaps pay less frequently than monthly, the true cost of borrowing won’t be represented by the APR.

Monthly Payments

If you’re looking to understand just how much of your monthly paycheck is going to go towards a loan, it makes sense to focus on the actual monthly payment. With most loans, this will be a percentage of the principal, as well as interest. However, some borrowing products have a more unique payment structure.

Take Unison’s Equity Sharing Home Loan. It’s a ten-year, fixed, interest-only loan with a shared appreciation component. In terms of the monthly obligation, homeowners have the option to partially-defer the interest payment to the end of the loan. Unlike standard refinancing, the Equity Sharing Home Loan allows homeowners to borrow against their home equity at below-market rates while keeping monthly payments low—starting as low as $455 on a $100,000 loan*.

Unison created the Equity Sharing Home Loan specifically to offer homeowners an alternative to traditional home equity financing that provided more flexibility in their monthly spending. If you want to save more money each month to put towards your goals, learn more about the Equity Sharing Home Loan today.

*For well qualified customers and based on current interest rate as of October, 2024. Rates subject to change. Other terms and conditions may apply.


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