Interest rate vs APR
The interest rate is the price of borrowing the principal. The Annual Percentage Rate (APR) is the all-in yearly cost of the loan, including the interest rate and other mandatory charges such as processing fees and the GST on them.
RBI's Digital Lending Directions require lenders to show the APR in the Key Fact Statement (KFS) before you sign, so you can compare offers on a like-for-like basis.
A simple example
Imagine borrowing ₹50,000 for six months at 24% a year with a 2% processing fee plus 18% GST. The fee and GST come to ₹1,180, and if they are deducted upfront you receive ₹48,820 — but you still repay EMIs calculated on ₹50,000.
Because you received less money but repay the same amount, the effective cost is higher than 24%. Calculated properly, the APR comes out at roughly 31%. You can see this in our EMI calculator by changing the amount and tenure.
Why short loans have higher APRs
A flat fee hurts more on a short loan. A ₹1,000 fee on a three-month loan is spread over just three months, so it adds a lot to the annualised cost. The same fee on a twelve-month loan adds far less. When comparing, always compare the APR for the same tenure.
What's not in the APR
APR covers charges you are certain to pay. Contingent charges — late-payment fees, bounce charges, or prepayment charges if you close early — are listed separately in the KFS. Read that section too, because a cheap APR with harsh late fees can still be costly if your income is irregular.
How to use APR when choosing
Put two offers side by side. Check that the amount and tenure match, then compare the APR and the total repayment. The lower APR is cheaper. Then look at the amount credited to your bank — make sure it covers what you actually need after fees.
If a lender won't tell you the APR before you sign, treat that as a warning sign.