What is APR and why does it matter?
Interest rates and APR are often confused by consumers
Let’s get straight to the technical definition of APR:
Annual percentage rate, otherwise known as APR, is the total cost of borrowing money from a lender
Still a little too…technical? Before we define the jargon, let’s try something new. A comparison can bring a concept to life more than a definition can. We’re explaining APR with analogies you may know more about: your child’s sweet tooth and pets. Choose the one that’s right for you:
Understanding APR through your child’s sweet tooth
Understanding APR through pets
Often, consumers confuse interest rates with APRs, assuming they are the same. However, an interest rate is the percentage a lender charges for borrowing money, while the APR is the total cost, including fees and other expenses. APR provides a clearer idea of the overall cost of a loan or credit line.
Where you may encounter APRs
When dealing with credit or debt, you may encounter APRs. Some credit products, like auto loans and mortgages, may have one APR, while others, such as credit cards, may have multiple APRs for balance transfers, cash advances, penalties, and more.
Understand the difference between variable and fixed APRs. Fixed APRs remain the same for the life of the loan, while variable APRs fluctuate based on an index rate. Variable rates may offer lower initial rates but could cost more if rates increase.
Review the different types of APRs before taking out debt or applying for a credit card. If you have questions about when an APR applies, ask your lender for clarification.
Why APRs matter
APRs matter because they reflect the total price of borrowing money. High APRs can monopolize your budget and lead to financial difficulties. Even with low APRs, too much debt can be hard to manage.
How to qualify for favorable APRs
Lenders review credit scores and other factors to determine APR. Those with excellent credit are more likely to receive favorable rates. Use this information to compare lenders and secure the best rates. While a low-interest rate may be appealing, understanding your APR provides a clearer picture of borrowing costs.