The difference between LIBOR and Prime Rates

LIBOR and Prime RatesPrime rate, LIBOR, Interest rate, and APR are all terms used frequently in the financial industry, but what do they all mean? Knowing this information will help you become a more informed borrower, and understanding the difference between an interest rate and APR will allow you to make an informed decision that will save you money in the long run.

Interest Rate

A loan’s interest rate is the monthly fee charged on the amount of money borrowed. Banks determine the interest rate you will pay by looking at your credit history and credit score. The higher your credit score is the lower the interest rate you will pay. Interest rates are based on one of two indices, the prime rate or LIBOR.

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The APR or Annual Percentage Rate is the rate you will pay on an annual basis including fees and discounts. The APR is the actual annual cost of the loan expressed as a percentage. The Truth in Lending Act requires all banks to provide the APR to allow you to compare different loan options on a level playing ground.

APR is an important factor to consider when looking at loans but should not be the only factor. Other factors to consider are the number of payments, total cost of loan, and monthly payment. Make sure the loan that you choose fits into your over all budget and financial picture. A loan that has a low APR but high monthly payments may be hard to maintain if the starting salary of your chosen profession does not support it. When looking at student loans, compare your all of your options before deciding.

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