Have you ever wondered what an APR is? APR stands for Annual Percentage Rate. It can be seen on credit card ads and used as marketing information for selling vehicles, loans, and more. While you may be familiar with the term “APR,” do you really know what it means?
For some, it’s a mysterious concept. While this is true, you can keep reading to learn more about it and why it is something you should understand.
What Is an APR?
The APR represents the interest you pay on the money you borrow. It doesn’t matter what type of loan you are taking out, student loan, mortgage loan, personal loan, or another type of loan; when you apply, the APR will determine the total cost of the money you need to borrow.
Different Types of Annual Percentage Rate (APR)
You also need to know the type of APR you have on your loan. Usually, it will be a fixed or variable APR. Learn about both of these here.
The fixed APR means that the APR won’t change based on an index during the loan’s life. Due to this, fixed APRs are usually more predictable when it comes to setting a budget. Some of the most common examples of loans that have fixed APRs include personal loans and most mortgages.
If your loan has a variable APR, it can change because it is connected to an index interest rate, like the prime rate found in the Wall Street Journal. This means if the prime rate goes up, the variable APR you pay increases, too.
A variable APR can fluctuate in your favor or against it. In some cases, a variable APR will offer you a lower interest rate; however, it may also go up, which is something to keep in mind. This type of APR is commonly seen on credit cards.
Annual Percentage Rate (APR) vs. Annual Percent Yield (APY)
While APR and APY sound and look similar, there is a difference in how the interest rates on these are determined. For example, APY stands for Annual Percent Yield. It represents what you are earning in interest. This means you will see APY on your savings account, money market accounts, certificates of deposit, and any other deposit accounts you have. You will not see an APY on credit cards or loans.
With APR, though, you get an overview of what you must pay in interest. Usually, this is related to loans, mortgages, automobile financing, and consumer credit cards.
What Can Impact Your APR?
Usually, the lender will determine the interest rate you should be offered when you apply for a loan. This is going to impact your APR. However, other factors can play a huge role in your interest rate, as well.
Lenders will probably consider your credit score and other factors when providing an interest rate offer. If you have a good or excellent credit score, you will probably get a lower interest rate than someone who has a lower credit score, even if all other loan factors are the same.
When you take time to shop around for the best deal, you can probably find a lender that will offer you a fair APR.
Now You Know the Answer To What Is an Annual Percentage Rate (APR) and Why It Matters
If you are trying to figure out an Annual Percentage Rate (APR), the information above should help you with this. Knowing what this is and how it can impact your loan is the best way to ensure you get good terms that meet your financial needs.