What Is Annual Percentage Rate (APR)?

When shopping for a loan or credit card, you can use the APR to determine its total cost and easily compare prices.


Because various factors influence the cost of loans and credit cards, you must know how APR differs from the other fees. Understanding APR can save you time and money, so you should review how to identify and calculate APR rates before choosing a loan or credit option to ensure you find the cheapest borrowing opportunity. You can learn how to find the best credit card and loan available to you by reading the following sections.

What is APR?

You APR reflects your annual interest rate for borrowing money. APR ratings are always presented as percentages and provide concise figures that you can compare to other loan or credit offers. In short, an APR depicts the annual cost you can expect to pay for borrowed money based on the total balance of the loan or credit. According to federal law under the Truth in Lending Act (TILA), creditors and lenders are required to issue APR ratings in the loan or credit agreement and to explain any aspect of the written agreement when necessary. Therefore, you are encouraged to carefully consider both the nominal interest rates and the APR given by lenders and creditors.

There are two types of APRs that may alter the way you interpret results. The first type of APR is a fixed APR. In the case of a fixed APR, lenders and creditors may not change the current interest rate without notifying you of the change. However, changes made to the interest rate are relatively uncommon and may only apply to future transactions. The second APR you may encounter is a variable APR. Variable APRs fluctuate because the interest rates change in accordance with the index interest rate. In other words, you may find that your APR increases or decreases as the prime interest rates, such as those listed in the Wall Street Journal, vary. The loan or credit agreement should state which type of APR applies to you .

While APR ratings are useful numbers for determining which lender or creditor offers the best deal, they can also indicate how affordable loans or credit cards may be independently of other APRs. A good APR, however, depends on your credit history and the type of loan or credit card you are requesting. Still, the average APR for credit cards ranges from 10 to 15 percent, and the average loan APR can be between 10 and 30 percent. Of course, your APRs will vary and may determine whether you should contemplate improving your credit score or not.

Although APR is a great tool to use, you must remember that APRs can be misleading in some circumstances. APRs can more accurately evaluate long-term loans, but APRs for short-term loans and credit may underestimate the annual cost. Additionally, an APR only assesses simple interest whereas an annual percentage yield (APY) also considers your compound interest (i.e., the interest of the interest). This disparity may affect your decision to settle on a loan or credit offer, so remain alert when looking at APRs.

APR for Credit Cards

Because credit cards use daily rates to express interest as opposed to monthly rates, credit APRs are interpreted differently than other APRs. Credit cards are multifaceted, and they have multiple APRs to match. To better understand how APRs are presented for credit cards, you can consult the following list of the types of credit APRs:

  • Introductory APRs: Creditors often give you introductory APRs based on your immediate interest costs to entice you. While having limited or no interest on your balance transfers or purchases for a short time (e.g., a year) can be attractive, make sure you pay your balance before your APR increases.
  • Regular APR: This rating expresses the interest rate you will have to pay on credit balances after the introductory period. Typically, creditors offer this as a variable APR.
  • Cash advance APR: When you request cash advances, creditors tend to increase your regular interest rate. You should take this into account before requesting cash advances.
  • Penalty APR: This APR accrues after you miss a payment. While most creditors strictly charge late fees for missed payments, some may also raise your interest rates.

To find the best credit card, you will want to assess all the possible APRs associated with a card. However, you only have to worry about credit interest rates if you fail to pay your monthly balances,

APR for Loans

Unlike APR rates for credit cards that are the same as interest rates, the loan APRs and interest rates will differ due to the additional types of fees included in APR calculations. Consequently, APR rates are often higher than loans’ interest rates. When you are shopping for personal or business loans, though, APRs are the best determinants for the true cost of the loan. The components of loan APRs typically consist of the interest rate, up-front fee and monthly payments of the loans. Since the separate costs of loans can be difficult to compare, APRs are invaluable.


How to Calculate Your APR

You may calculate your APR for a particular loan or credit card, you can determine a daily or monthly interest rate. The steps you may use involve finding your interest charges (also called finance charges) and determining your remaining balance. You should divide your finance charges by this remaining balance. You can break down your APR to discover your monthly or daily interest rates by dividing the APR by 12 and 365, respectively. Convert the result to a percentage by multiplying by 100.

For loan APR calculations, you may want to use a specialize calculator to estimate your APR. Therefore, you can follow these steps:

  1. Find an online APR loan calculator. This should be a calculator for the specific type of loan you are requesting (e.g., mortgage).
  2. Input your loan information. For example, you should include your loan amount, loan fees, interest rate and loan period.
  3. Click “calculate” to get your result.

How to Find the Lowest APR

To find the lowest APR available to you for loans or credit cards, you may have to consult several lenders and creditors. Additionally, you should request an estimated APR from each lender or creditor and create a side-by-side comparison of the APR results. However, there are a few actions you can do to prepare for loans and credit cards that can secure you a lower APR. For example, you can check your credit report for errors and make improvements by paying off any debts you may have incurred. You should also check average interest rates for your area. If you are familiar with common interest rates offered to others in your city, then you may be able to negotiate lower rates.


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