What is an APR?

Annual Percentage Rate (APR) is a type of interest rate that reflects the annual cost of borrowing money. It’s used to compare different borrowing products, such as credit cards, mortgages, and car loans. The higher the APR, the more a borrower will have to pay back in interest and fees over the course of the loan.

APR provides a good starting point for consumers to evaluate their borrowing options. It’s important to understand how to read an APR and to know that credit card companies and other lenders can offer different types of APRs for the same loan.

How Is APR Calculated?

APR takes into account the total cost of borrowing money, which includes not only interest charges but also other fees that may be charged to acquire a loan. The calculation of APR includes all non-interest charges associated with the loan. Therefore, it’s a more accurate representation of the actual cost that a borrower will pay compared to the “headline rate” of interest typically advertised by banks or other lenders.

To calculate an APR, lenders typically start with the interest rate associated with the loan and then add any fees associated with acquiring and maintaining the loan. The most common fees included in APR calculations are annual fees, origination fees, and closing costs. Other costs, such as late fees and prepayment penalties can also be included.

Should You Be Concerned With APR?

Yes, it’s important to pay attention to the APR when shopping for a loan. APR is the best way to evaluate the true cost of the loan after taking into consideration all fees associated with it. Comparing APRs can help you decide between two different borrowing options and save you a significant amount of money in the long run.

It’s also important to remember that lenders can have different APRs for the same type of loan. For example, different credit cards may have different APRs for balance transfers. Furthermore, APRs can change over time as interest rates fluctuate. Therefore, it’s important to stay on top of the rates and make sure that you’re getting the best deal for your loan.