If you’re thinking of buying land, then it’s a good idea to brush up on some terms commonly used in the finance world. You’ve probably heard the terms interest rate and annual percentage rate (APR) many times in your life, but you may not be aware of the difference between the two.
Anytime you’re considering a loan — in the form of a mortgage, a credit card balance, or an owner financed land deal — these definitions are essential to understanding the terms of that loan. First, we’ll go over what an interest rate is vs. an APR. Then, we’ll break down in detail what this means if you purchase land through Land Elevated. So read on to find out all about interest rate vs. APR on owner financed land.
Interest Rate vs. APR: What’s the Difference?
Both interest rates and APRs are expressed as percentages, which can make things confusing. However, there are usually some very distinct differences between an interest rate and an APR.
Interest Rate
An interest rate is the percentage a borrower will pay on the principal loan amount. This percentage is used to determine the cost of borrowing the principal amount of the loan. Since interest rates are calculated yearly, loans with shorter terms will require larger payments up-front but will be more favorable in terms of total interest paid than loans with longer terms.
Interest rates fluctuate for a number of reasons, but the most notable one is the Federal Reserve. In times of economic growth, interest rates tend to rise to encourage saving rather than spending. During recessions, interest rates tend to lower, encouraging people to spend and secure loans.
While a loan’s interest rate is certainly a number you should be aware of, it’s not a complete number for determining the pertinent details of a loan.