What Does Annual Percentage Rate - APR Mean?
APR stands for Annual Percentage Rate. It is the cost of borrowing a certain amount of money expressed as a yearly rate. APR depicts the annual interest rate for a whole year. It is applied to any credit situation, for example when applying for military loan and civilian loan, credit cards, small loans, auto loans, and mortgages. It is calculated according to a formula determined by the government and came about as a result of the federal Consumer Credit Act of 1974 to normalize the way lenders promote and inform a potential borrower of their interest rates. ARP can be used to compare different credit and loan offers and facilitate the decision-making process.
APRs on Credit Cards
The APRs of credit cards are one of their highest selling features. To choose the best credit card rates follow these suggestions:
- Study the offer carefully.
- Look at the validity of the current APR. Most creditors offer low APR for just a few months and thereafter the APR rises to a significant amount, which varies from creditor to creditor.
- Look for annual fees, or other applicable fees. A creditor may offer you a low APR but charger higher fees. These are things you should look out for. An annual fee of $70 for a couple may be on the higher side.
APRs are linked to WSJ Prime Lending Rate which is published by the Wall Street Journal. If this rate goes up, APRs follow suit. APR works best if you are comparing similar types of credit, over similar periods.
APRs do not apply to credit cards unless there is a balance amount to be paid to the creditor. If you are in the habit of paying your credit card bills in full, then APR does not apply to you.
APRs on Small Loans
The Formula designed by federal government to calculate APR has little meaning when applied to short-term loans. This is because installment loans for small amounts can have lower interests than credit card loans. You’re likely to see a difference of just a few dollars even with a difference of 15% in the APR. If you’re thinking of obtaining a loan from small loan company keep the following in mind:
- Check out the company backgroun
- Check out the company’s reputation
- Find out how quickly they can process your loan
- Determine whether or not you can afford their monthly payments.
APRs on Home Loans
APRs play a vital role in long-term loans such as a mortgage. In this situation, the Note Rate or the actual rate used to calculate the borrower’s monthly payments is usually lower than the APR. The APR includes costs such as origination fees, premiums on mortgage insurance, inspections, prepaid interests, and lender’s fees. Therefore, the higher the loan the less effect these fees will have on the APR. A few tips when shopping for a mortgage:
- Loans with a low APR are not necessarily the better deal
- The lender is required to disclose all the fees applicable. Make sure you are aware of all of them.
Calculate all the applicable fees and work out how much the loan is actually costing you. The lender which offers you lower fees usually has the better deal.
APRs on Auto Loans
Loans on automobiles are for a considerable amount and stretch over a number of years. The APR is significant factor in such cases. Choosing wisely can save you thousands of dollars over the duration of the loan.
