APR Meaning and Significance

What does APR stand for, and why does it matter regarding your finances?

APR stands for annual percentage rate, and it’s a crucial factor when borrowing money or using a credit card. It’s a rate calculated based on a yearly cost and represented as a percentage.

APR matters because it represents the cost of borrowing money, including an interest rate and associated fees. APR helps consumers compare online loan and credit card offers so they can choose the best deal with the lowest overall cost.

In this article, the loan experts at Tower Loan discuss the answers to “What is APR on a loan?” and “What does APR mean on a loan?”

What Is APR?

Many people question the APR meaning in finance, so let’s start this section with an annual percentage rate definition.

APR is the cost you’ll incur to borrow money over the course of a year, including interest and fees. APR is based on simple interest and does not account for the compounding interest within a year. Instead, APR is a bottom-line number used as a basis of comparison before you take out a personal loan, credit card, or investment product.

How APR Works

Now that you understand the APR meaning, how is it calculated?

To calculate APR, multiply the periodic interest rate by the number of periods it applies to. Here is the formula to calculate APR:

• APR = ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100

It is crucial to consider both interest and fees as you calculate APR. The number of monthly payments you commit to determines your overall borrowing costs.

Different Types of APR

You should be aware of two different APR types before applying for a new line of credit or taking out a loan. Fixed and variable APRs represent significant variations on the general annual percentage rate definition.

Fixed APR vs. Variable APR

A fixed APR has an interest rate that remains constant over the loan’s term. With this type of APR, your loan rate is guaranteed not to change for the entire time you have your loan.

On the other hand, a variable interest rate can change based on market conditions. A variable interest rate is subject to change at any time without warning.

Credit Card APR Types

What does APR mean for credit cards?

Credit card APRs vary based on charge type, as credit card companies often have different APRs for purchases, balance transfers, and cash advances. A purchase APR is the rate for standard credit card transactions. Cash advance APRs are typically higher than purchase APRs because they involve drawing out cash. There may also be special rates involved for transferring balances between accounts.

Credit card issuers also impose penalty APRs, which are increased rates for late payments. If you sign up for a new credit card during a promotional period, you may be eligible for a temporary 0% or very low APR. However, once that promotion expires, you’ll face a higher, more standard APR from that point forward.

Representative APR vs. Personal APR

APRs can serve as a general baseline for comparison or be a specialized number unique to only you. Next, let’s look at the representative vs. personal APR meanings.

Representative APR

When you want to borrow money, you may see a loan offer with a representative APR. This is a general rate lenders advertise because it applies to at least 51% of applicants approved for loans.

Personal APR

However, a personal APR is the actual rate that a borrower will receive. Your personal APR is based on your specific credit history, income, and loan amount. You might get a rate different from the representative APR if you have a very low or high credit score, income, or debt-to-income ratio.

How Lenders Determine Your APR

What APR is on a loan depends on several factors. Here’s how lenders like us determine what your APR is:

• Credit score and history
• Loan amount and term length
• Type of loan (secured vs. unsecured)
• Market interest rates

Shopping around with a few lenders can help you find a lower APR. Please contact us to see what we can offer you.

APR vs. APY (Annual Percentage Yield)

While APR does not account for compounding interest, APY does.

Annual percentage yield (APY) is a calculation that factors in compounding interest, meaning that an APY is typically larger than an APR, even if they are both associated with the same interest rate on a loan. APY is more accurate than APR, yet lenders are required by law to disclose both percentages.

APY includes small interest shifts due to this compounding, while APR is an unchanging baseline figure.

For example, let’s say you borrow $10,000 with an APR of 12%. Your interest for one month is $100, bringing the balance up to $10,100. Next month, interest is determined on this new amount, making it slightly more than the previous month – $101.

How to Find Out Your APR Before Applying

We highly recommend understanding your APR before applying for an installment loan. Pre-qualification offers and soft credit checks can inform you without affecting your credit score. You can also use online calculators and free tools to estimate your APR.

Reducing Your APR: Tips to Lower Your Borrowing Costs

Now that you understand the APR meaning, here are some tips to lower your APR and borrow money as affordably as possible:

• Improve your credit score before applying.
• Compare multiple lenders for the best rates.
• Consider secured loans or co-signers for lower APRs.
• Take advantage of promotional 0% APR offers on credit cards.

Contact Us to Discuss Your APR

What does APR mean on a loan for you right now? If you’re looking to take out a loan in the near future, it is crucial to understand the factors that go into APRs and how they impact your overall borrowing costs.

We encourage you to compare APRs between multiple sources before making a major financial decision. We also welcome you to call or visit our staff in person to see how we can help get you the best APR and the cash you need quickly and conveniently.