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? Well, before we define the jargon within the jargon, let’s try something new. Many times, a comparison can bring a concept to life more than a definition can. So, we’re explaining APR with analogies you may know a little 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 thing. However, an interest rate is the percentage a lender charges you for borrowing money, while the APR is the total cost, which may include fees and other borrowing expenses. Essentially, the APR gives you a better idea of what you will pay for taking out a line of credit or a loan.
WHERE YOU MAY ENCOUNTER APRS
When dealing with credit or debt, you may encounter APRs. While some credit products, such as auto loans and mortgages, may have one APR, others, such as credit cards, may have multiple APRs you need to be aware of. When credit cards send you offers, you may see different APRs for balance transfers, cash advances, penalties, and more.
You’ll also want to understand the difference between variable and fixed APRs. Fixed APRs will remain the same during the life of the loan, while variable APRs have index interest rates that could fluctuate up or down depending on the index the rate is attached to. Even though variable rates may provide a lower rate upfront, they could end up costing you more if they increase over time.
That said, make sure you review the different types of APRs before you take out any debt or apply for a credit card. Although most APRs are straightforward, if you have any questions about when an APR is applied, be sure to ask your lender to explain.
WHY APRS MATTER
APRs matter because they let you know the total price you’re paying to borrow money. You’ll want to steer clear of any debt with high APRs because the payments may end up monopolizing your budget, which could put you in a sticky financial situation. However, even if you have low APRs, you need to be mindful of the amount of debt you take out. Too much debt could become too challenging to manage.
HOW TO QUALIFY FOR FAVORABLE APRS
Lenders review your credit scores along with several other factors to determine your APR. Someone with excellent credit will most likely receive a more favorable rate than someone with a low credit score.
Use this information to find the best rates and compare multiple lenders. And remember, while a low-interest rate might be appealing, understanding your APR will give you a better idea of the total cost of borrowing.