What is APR

Writer and editor - Bryan Robinson | Updated on 2023-01-11

APR Basics

Annual Percentage Rate (APR) is the yearly rate of interest that is charged on an investment, loan or line of credit. It is important to understand how APR works because it can affect the total cost of borrowing money. In this article, we will explain APR and how it works.

What is APR?

As stated above, APR represents the amount of interest you will be charged per year on any outstanding balances on your credit card. For example, if your APR is 20% and you have a balance of $1,000 at the end of the month, you will be charged $200 in interest for that year ($1,000 x 20%).

APR can have a major impact on your overall credit card costs. For example, if you carry a balance on your card from month to month, you will be charged interest on that balance at the APR rate. The higher the APR, the more interest you will pay.

There are two types of APRs:

  • The purchase APR is the rate applied to any new purchases made with your credit card.
  • The cash advance APR is the rate applied to any cash advances taken from your credit card (this includes things like ATM withdrawals or using your credit card to get cash back at a store).

It’s important to note that both purchase and cash advance APRs are typically higher than the rate applied to balance transfers. Additionally, most credit cards will charge a higher APR if you make a late payment or go over your credit limit.

How is APR calculated?

Annual Percentage Rate (APR) includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay. This rate is meant to reflect the true yearly cost of borrowing money.

To calculate APR, divide the total amount of interest and fees you pay in a year by the total amount you borrowed. The result is your APR. The higher your APR, the more expensive your loan will be.

For example, let’s say you take out a $200,000 mortgage with a 4% interest rate and a $2,000 origination fee. In this case, your APR would be 4.08%. That means you’d pay $816 in interest and fees over the course of one year.

What is the difference between APR and interest rate?

The main difference between APR and interest rate is the APR includes all the associated costs of taking out a loan, while the interest rate only reflects the interest charged on the principal of the loan.

The Benefits of APR

Here are some benefits of APR:

APR can help you compare credit cards

An APR, or annual percentage rate, is the interest rate charged on credit card balances. It’s important to know what your APR is so you can calculate how much interest you’ll pay on your outstanding balance. You can usually find your APR on your credit card statement or online account.

APR can be helpful when you’re comparing different credit cards. For example, if two cards have the same interest rate but one has a lower APR, that means the second card will charge you more in interest over time. So, if you’re trying to decide between two cards, it’s generally better to choose the one with the lower APR.

Keep in mind that some cards offer special introductory APRs that are lower than the regular APR. This can be a good way to save money on interest if you plan to carry a balance on your card. Just be sure to check what the regular APR will be after the intro period ends so you don’t end up paying more in interest than you expected.

APR can help you compare loans

APR is a helpful way to compare different loans because it shows the total cost of a loan over time.

For example, let’s say you want to compare two loans: Loan A has an APR of 7%, and Loan B has an APR of 6%. Loan A costs you $70 in interest and fees for one year; Loan B costs you $60 in interest and fees for one year.

Loan A has a higher APR than Loan B, so it’s more expensive in the long run. But what if Loan A has a lower monthly payment than Loan B? That’s where things get tricky.

To compare loans fairly, you need to look at both the APR and the monthly payment. In this example, let’s say that Loan A has a monthly payment of $100, and Loan B has a monthly payment of $150. To find out which loan is cheaper, you need to calculate the total cost of each loan over time.

With Loan A, you’ll pay $100 per month for 12 months, for a total of $1,200. With Loan B, you’ll pay $150 per month for 12 months, for a total of $1,800. So even though Loan A has a higher APR, it’s actually cheaper than Loan B because you’ll end up paying less interest and fees over time.

Related: Fixed rate loan page, or page Variablerate loan.

The drawbacks of APR

APR can be a great way to quickly generate content for your website without having to put in a lot of effort. You can find PLR articles, spin them, and post them to your autoblog which will save you time. APR can also help you rank higher in the search engines because you will have more content on your site. However, there can be a few downsides to it as well.

APR can be confusing

APR can be confusing because it is not always clear how it is calculated. Additionally, different lenders may use different methods to calculate APR, which can make comparison shopping difficult. For these reasons, it is important to understand how APR works before taking out a loan. APR is the combination of the monthly interest rate and any additional fees charged by the lender.

Some loans, such as credit cards, have multiple APRs that can apply depending on the type of transaction you make. For example, a credit card may have a lower APR for balance transfers than for cash advances.

APR can be misleading

An APR, or annual percentage rate, can be misleading because it’s a yearly rate. That means if you carry a balance on your credit card and are only making minimum payments, it will take you longer to pay off your debt than the APR would suggest.

For example, let’s say you have a credit card with an APR of 15%. If you only make minimum payments, it will take you more than seven years to pay off your debt and you’ll end up paying more than $2,000 in interest.

If you’re trying to decide whether to get a credit card or take out a loan, it’s important to look at the big picture and not just the APR. Sometimes, a loan with a higher APR may have lower fees and charges than a credit card with a lower APR.

Bryan Robinson

Bryan Robinson
Writer and editor

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