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What is APR? A Guide for Consumers

What is APR? And why is it important? The annual percentage rate, or APR, is a crucial consideration when borrowing money. Let’s go over the details and explain this important financial term.

APR Defined

Lenders will transfer money to borrowers’ accounts with the understanding that they will repay the loan. As compensation for the loan, the borrower pays interest (a percentage of the amount borrowed) to the lender.

The APR is a broad measure of how much it costs to borrow money. Annual Percentage Rate typically includes the interest you pay on the amount borrowed, as well as any fees or charges.

APR is usually higher than the loan interest rate because it includes more information. Because the Annual Percentage Rate is inclusive, it can be more useful to consider than just interest rates when comparing different loan costs.

Federal law requires that lenders provide an Annual Percentage Rate for their loans. Consumers must know the Annual Percentage Rate before applying for a loan online or in-store. An online calculator is available to help you calculate the rate.

How Annual Percentage Rate Works

The APR is a percentage of the loan amount. Let’s take an example to illustrate how it works. Consider two installment loans.

Both loans have the same amount and repayment terms. Loan B may seem more attractive if you only consider the interest rate. Borrowing at a 29.5% interest (loan A) is better than borrowing at 30.0%interest(loan B).

However, the Annual Percentage Rate tells a completely different story. When you take into account all fees, Loan A looks more appealing.

Annual Percentage Rate on Payday Loans

Payday loans are typically short-term (generally less than 30 days), and they are charged based on fixed fees, not interest rates. However, you can still calculate their annual percentage rate. It can be helpful to compare the Annual Percentage Rate for of payday loans with personal loans when you are weighing your options.

Annual Percentage Rate for Credit Cards

If you are borrowing money with a credit card, the Annual Percentage Rate is an important consideration. There are many types of Annual Percentage Rate for that you will be subject to, including:

  • Purchase APR. An amount that is charged for carrying a balance. You should know that credit cards often have variable APRs, which means that your rate can fluctuate depending on an index like the federal Prime Rate.
  • Annual Percentage Rate for a balance transfer. Transferring balances to other credit cards to pay them off.
  • Cash advance APR. The amount you pay to use your credit cards to withdraw cash at an ATM or bank.
  • Penalty APR. The rate is imposed if you are significantly behind in your payments.

Stay tuned to our blog for more information about key financial concepts, such as managing credit inquiries or understanding debt consolidation. Our interactive tools are free and can be used to budget, set savings goals, and tackle debt.

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