Link to this page Print RSS  

What is APR? Annual Percentage Rates Defined
 

What is APR? The definition of APR, or annual percentage rate, is the interest rate charged on the amount borrowed. It’s a look into what it costs to borrow money annually, making it easier to compare different mortgage, credit card, or other loans. By looking at the APR, you can tell at a glance what program would be a better deal. However, there are several types of APR. We explain APR in this guide, so when you take out a new loan or line of credit, you can make an informed decision as a consumer.

•    Fixed APR
A fixed APR usually remains the same throughout the life of the loan, ending at the same percentage as when it was originally borrowed. This type of APR is often seen on mortgages, such as a 30 year fixed rate mortgage.

•    Variable APR
A variable APR can change without any notice, and to whatever amount the lender decides. Be wary of these, especially when borrowing large amounts, such as a home loan. Having your APR jump from 5% to 20% can be extremely difficult to manage.

•    Nominal APR
Nominal APR is the interest stated on your loan. It is calculated as the rate for a payment period multiplied by the number of payment periods in a year. It differs from the effective APR.

•    Effective APR
The effective APR includes fees that have been added into your balance. This means the effective APR on a mortgage or loan may be higher than the nominal APR.

•    Credit Card APR
Credit card APRs differ from other loans in that they have several different APRs for each type of balance. APRs can vary widely between cash advances, purchases, and balance transfers. Be aware of each in order to avoid large interest fees.

APR is often confused with APY, which stands for annual percentage yield. APY differs from APR in that APY is interest paid to you, instead of interest paid to another entity. For example, when you make a deposit into a savings account, it begins to accumulate interest. APY is the money you earn on the deposit over the course of a year. Just as it’s important to compare APR rates, it’s also important to compare APY rates. The better your APY, the more money you earn.

 

Link to this page Print RSS