The interest rate is the price a lender charges for the money you borrow, expressed as a percentage of the balance. The annual percentage rate, or APR, is a broader number that includes the interest rate plus most mandatory fees, expressed as a yearly cost. When you compare two loans, the APR is the fairer measure, because it shows what the credit actually costs over a year rather than just the headline rate. A low rate with high fees can cost more than a slightly higher rate with none.
What the Interest Rate Tells You
The interest rate applies to your outstanding balance and determines how much interest accrues each period. On a simple loan, it is the main driver of cost. On a loan with fees, it tells only part of the story. A lender can advertise a low rate while charging an origination fee, an administration fee, or a monthly service charge, all of which raise the true cost above what the rate suggests.
What the APR Adds
The APR folds the interest rate and most mandatory fees into one annual figure. It lets you compare offers on equal footing, because a loan with a low rate and high fees will show a higher APR than the rate alone implies. Read the APR before you decide. If a lender quotes only a rate and refuses to give an APR, treat that as a warning sign.
| Measure | What it includes | Best used for |
|---|---|---|
| Interest rate | Cost on the balance only | Understanding the base cost |
| APR | Rate plus most mandatory fees | Comparing offers fairly |
| Total cost | Every payment over the full term | Seeing the real dollars paid |
Why the Same Rate Can Cost Different Amounts
Two loans with the same interest rate can have different APRs if their fees differ. They can also cost different total amounts if their terms differ. A longer term lowers the monthly payment but raises the total interest, because you carry the balance for more months. That is why you should compare APR and total cost together, not in isolation. The lowest monthly payment is not the same as the cheapest loan.
The Legal Ceiling
Canada caps the criminal rate of interest at 35% APR, a limit that dropped from roughly 48% effective January 1, 2025 under the Criminal Interest Rate Regulations. That ceiling applies to the annual cost of credit, which is why the APR matters legally as well as practically. Payday loans sit in a separate category, capped at $14 per $100 borrowed, because their short terms push the annual rate far above 35%.
How to Read a Loan Offer
- Ask for the APR in writing, not just the interest rate.
- Add up all fees and check whether they are in the APR.
- Multiply the payment by the number of payments to get the total cost.
- Compare the same term length across offers.
- Check whether the rate is fixed or variable.
Common Traps
A promotional rate that expires after a few months is not the APR you will pay for the life of the loan. A fee deducted from the amount you receive means you borrow less than the headline amount while paying interest on the full sum. A variable rate can rise, so the APR quoted today may not be the cost tomorrow. Read the agreement, not just the advertisement, and ask what happens after any introductory period ends.
An Example of the Gap
Suppose two loans both quote the same interest rate. The first charges no fee. The second charges an origination fee that is deducted from the amount you receive, so you borrow less than you asked for but pay interest on the full sum. The second loan has a higher APR even though the rate is identical. That is the whole point of the APR: it exposes costs the rate conceals. When you compare offers, put the APR, the total cost, and the term side by side, and treat any offer missing one of those numbers as incomplete.
Sources and further reading
- Financial Consumer Agency of Canada, for guidance on the cost of borrowing and how APR is presented.
- Criminal Interest Rate Regulations (SOR/2024-114), which set the 35% criminal rate of interest.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.