This video explains how APR works when applied to a car loan.
What Is APR?
APR stands for annual percentage rate.
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Essentially, the higher the APR the higher cost to borrowing money and vice versa.
While not all fees are included, APR is a good place to start comparing lines of credit.
The Two Types of APR
There are two types of APR: fixed APR and variable APR.
Fixed APR
Just like it sounds, fixed APRs dont change.
Accordingly, fixed APRs are more predictable than a variable APR.
This underlying rate fluctuates with economic conditions and, therefore, variable APRs fluctuate as well.
Basically, when the index rate goes up, your variable APR goes up.
Credit cards also often have multiple APRs depending on the throw in of transaction.
Purchase APR
Purchase APR is the interest rate applied to the purchases made on the credit card.
If you pay your statement in full each pay period, youll avoid this all together.
During this period, you’re free to pay off the purchase without incurring any interest.
If you do hold a charge over the billing cycle, then the purchase APR is applied accordingly.
Normally this APR is higher than the Purchase APR, and there is no grace period.
Not all cards have a Penalty APR, but if it does, its normally the highest APR.
Introductory APR
Introductory APRs are normally very low rates that apply for a set period of time.
Just confirm that you know the timeline and what the APR will be after the promotional period has ended.
Whats the Difference Between APR and Interest Rate?
APR and interest rates both represent the amount youll be charged for borrowing money.
However, APR includes any fees or expenses associated with the loan, and an interest rate does not.
Because of this, APR is a more accurate representation of how much borrowing money will actually cost you.
The Difference Between APR and APY
Both APR and APY are ways to demonstrate interest rates.
APR is the annual percentage rate and demonstrates the combined yearly cost of interest and fees for a loan.
Knowing the differences can earn you big financial dividends and save you from unexpected financial costs.
Thats where APY, which already includes compounding interest, becomes more helpful.
Again, its not a false representation, just a strategic one.
Every bank has different margins and interest rates, but the overall concept is the same.
For example, say youre carrying a balance of $700 on your credit card with 25.99% APR.
While that seems small, the interest quickly begins to build.
What Determines the APR Youre Offered?
APR calculations often begin with an index rate that reflects the economic conditions at the time.
Credit cards then add a fee on top of that called a margin for using their service.
This margin depends greatly on the cardholders credit score.
People with good credit scores are offered better APRs than those with bad credit scores.
Because of this, its important to understand how toimprove your credit score.
The Bottom Line
Credit and loans are a part of modern life so APR isnt going anywhere.
In these moments, understanding APR will help you be an informed borrower.
APY stands for the annual percentage yield and represents the interest earned over the course of a year.
This means that the higher the APY the more interest youll earn on your money.
A good APR is one that is below the national average interest rate for that throw in of loan.
A rate below the average means youll be paying less for the loan than most borrowers.
Probably not as good as youd like.
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