What Is Annual Percentage Rate (APR)?
You must likely have seen the term APR, annual percentage rate, on your credit card statements and all things financial.
But, do you know what APR really means? Don’t worry, you aren’t the only one. APR is used on any type of loan that you take out, anything from mortgages to credit cards to car loans has an APR. Basically, APR is the interest rate that you pay each year on a loan that you have borrowed. Interest rates are a nuisance. As annoying as they are, it is important that you understand them.
But why?
Understanding APR will help you when you are comparing different loans from lenders.In turn, this will help you make much better financial decisions. So, here is everything you need to know about APR.
What Is APR?
APR is the total interest amount that you have to pay for each year that you have taken out a loan. In other words, it shows you how much you have to pay so that you can borrow the money.
APR is one aspect that can help you determine your affordability of a loan. It is a reflection of the true cost of borrowing. This is because it includes interest rates, points, costs, and broker fees. Usually, the lender determines the APR because their fees are included. With that being said, lenders have an obligation to disclose APR in every loan agreement it gives the consumer. This is so that they are in keeping with The Truth in Lending Act (TILA). However, lenders do not have to communicate all fees, like credit reporting. So, it is important that you keep that in mind.
One way to get around this is to ask your lender directly about the costs. That way, you will already be fully aware of all costs and won’t be surprised later down the line. Another way to get around this is to make use of Point Of Sale Financing when purchasing high ticket items like furniture, beds, or jewellery. Point Of Sale financing providers like ChargeAfter.com offer shoppers 0% APR when they are approved for an instant loan on checkout!
How Does APR Work?
A low APR is usually less expensive. But, there are many factors involved in determining the APR. Also, it differs with each type of loan. Mortgages, credit cards, personal or car loans will all have a different APR.
For example, let’s say that you have taken out a credit card with an APR of 10%. That means that you will pay around $100 a year for every $1000 you have borrowed.
Fixed and Variable APR
APR can either be fixed or variable. If you have a fixed rate APR that means you will pay the same amount throughout the entirety of the loan. Although, with credit cards, your lender can change the fixed rate. If they do, they must give you 45 days notice beforehand.
Variable is the opposite of a fixed APR and can change. It can either increase or decrease as they are not tied to any index.
How Is APR Calculated?
The interest, the loan amount and number of days in the loan term is how APR is calculated.
APR= (Principal,Fees+Interest / n)×365)×100
Principal > Loan amount
Interest > Total interest paid over the duration of the loan
n > number of days included in the loan.
Your income and credit report plays a huge role when it comes to the APR of the amount you want to borrow. Regardless of whether you want a mortgage, personal loan or credit card. It is a good idea to clear up any errors on your credit report beforehand, as that will help you get a lower APR. It also helps you if you have had a long period of a steady income and have not defaulted on any monthly payments.
Final Thoughts
Borrowing money is a huge financial decision no matter the amount. Understanding APR, its terms and how it is calculated helps you to establish how much you can afford to pay back. It helps you to figure out your budget and how to use your loan wisely. Additionally, you reduce the risk of defaulting on your payments should your income change. It also helps you to avoid high-interest rates. Put this way, the more you know, the more bargaining power you have when it comes to negotiating with your lender. After all, they wouldn’t want you to go elsewhere so go in fully prepared!
