What is an APR, or Annual Percentage Rate?
If you are new to the credit card world or just trying to understand different fees added to your loan, learning what the APR rate is will be quite important for you. Annual percentage rate or for short- APR by definition is a tool used by lenders to calculate interest on a loan. Here we will give you in depth introduction to how APR works and why is it so important for you.
The Annual Percentage Rate, or APR, is the rate you’ll be charged on your loan and is based on the length of it as well as the interest rate. Know what APR is before you get it offered since it could have a great impact on your decision to take out a loan.
An APR is always given as a percentage. So, let’s say, for example, that you are offered a 10% APR on your credit card what this means is that the rate you’ll pay on top of your bill is 10% of it. Now you may be wondering what is a good APR. Well, that depends on the loan you took out as it can vary quite a bit. For credit card APR, everything below 14% is considered good. As for mortgage APR, you should typically look for 5.6% to 5.8% on a 30-year term.
Keep in mind that the length of the loan affects APR, with shorter-term loans having it higher than long-term ones.
How Does APR Work?
This financial term is often used to describe the interest rate that a lender charges on a loan. But, in all honesty, it’s important for you to understand that APR is calculated based on a number of factors, including the terms of the loan, the credit score you have, and the amount of money you want to take out.
Getting familiar with APR can really help you make better decisions when borrowing any money. Just don’t forget that APR can change over time, so be sure to check it not that long before you actually apply for a loan.
How Is APR Calculated?
The Annual Percentage Rate (APR) is calculated by taking the annual percentage of the loan amount, divided by the total amount borrowed.
To give you an example, if you decide to borrow $50,000 over a period of 12 months and the interest rate you got is 10%, then your APR would be around 11%. This all can get a bit confusing and also varies depending on your loan term, as well as some other fees, so we suggest you use the APR calculator so you can easily find online just to give you a general idea.
What Are the Different Types of APRs?
While we gave you good basic information, it’s important to mention that there are a few different types of APRs. Here’s a breakdown of the most common types:
- Fixed APR – this type is always the same, regardless of how much you borrow, and is the one most people are looking for.
- Variable APR – this one changes based on the interest rate so it can be anywhere from 0% to 24% or even more.
- Teaser APR – when you first borrow money there is a possibility you will get this type. It is lower than the regular APR.
- No-cost loan – this loan does not have an APR, but it still does have fees associated with it such as origination fees or closing costs.
APR vs. Interest Rate: What’s the Difference?
Let’s first explain briefly both of these rates once again so you get a better idea of how they differ.
An APR is a type of rate that reflects the cost of borrowing money over a period of time. Besides interest, it also includes other fees like insurance, closing costs, loan origination fees, etc.
Interest rate vs APR stands for the amount you will be charged for borrowing the money. It is also expressed as a percentage but it doesn’t include any other fees in it and usually stays fixed over the life of a loan.
So, the key difference is that APR reflects the cost of borrowing money over a period of time while an interest rate reflects the amount that you will pay for borrowing the money.
If you still don’t understand this that well, don’t worry we will give you an example for both.
If you borrow $10,000 over a period of 12 months at a rate of 10% APR, your total cost would be around $1,060 ($10,000 x 10). This amount would be due on each monthly installment. Be cautious, because this is just an estimate and does not include other important information like fees that should also be added.
On the other hand, if you borrow $10,000 over a period of 12 months at an interest rate of 12%, your total cost would be around $1,200 ($10,000 x 12). This amount would also be due each month and would remain unchanged regardless of how many months the loan was outstanding.
As we already said, the examples we gave you do not have all the necessary information for you to get an exact number, so treat this as an estimate only and find different calculators available online to get a better predicament for your loan.
Many people also get confused about APR vs APY, so let’s tackle that as well. Both of these rates are calculated based on interest rates and some other factors. The main difference is that APY will give you the most accurate idea of an account’s earning potential, while APR gives an idea of what you could owe.
What Is a Good APR?
If you’re thinking about a new credit card offer or you are in a process of getting a loan, you’re likely wondering what is the good annual percentage rate. We already talked about different factors going into your APR percentage but don’t forget your credit score can affect it too.
If the APR you’ve been offered isn’t good here are some tips on how to get it cheaper:
- Shop around – same as interest rates, different banks offer different APR rates, so be sure the compare different offers before settling on one.
- Introductory offers – many banks will offer you an introductory APR rate that is lower than the standard rates.
- Check your credit score – if your score is low, you can be stuck with an APR that’s higher than usual so the lender can compensate for the risk of giving you a loan. However, don’t let this scare you away- there are still some good offers out there you may just need to look a bit harder.
Now that you’ve got familiar with the meaning behind APR, we hope you got a better understanding of the different factors affecting the amount you need to pay back. Many people overlook this percentage and get shocked when they see it in a credit card bill as well.
While we cannot provide you with exact numbers and percentages of what your APR would be, we gave you a general idea of how it works and how you can calculate it yourself.
We still advise you to be careful when taking out a loan as all the different fees can add up. Consider talking to a skilled financial advisor or a good and trustworthy lender so you can understand it all perfectly and find the best option for your situation.