What is APR?
We’re guessing you’ve been thinking about applying for a loan, and you’ve heard about a term called “APR,” right?
And you’re wondering, just exactly what does APR mean?
You’ve come to the right place to learn more.
What does APR mean?
APR stands for “annual percentage rate,” which is the total yearly cost of borrowing money expressed as a percentage of the loan amount.
This annual rate includes the amount of your interest and certain other additional costs or fees associated with the loan.
APR can be used as a number to help compare the total cost of one loan to another.
How is APR different from interest rate?
Excellent question—the two are often confused.
The interest rate is the percentage of the principal that a creditor charges the borrower for lending them money.
APR, however, combines interest rate with certain additional costs and fees that a lender may charge, resulting in the annual cost of a loan. As a result, a loan’s APR may be higher than the interest rate, and it’s more informative about the total cost you’ll be paying.
When you apply for a loan, it’s important to consider the APR and not just the interest rate.
What is factored into an APR calculation for a personal loan?
APR is the annual cost charged by a lender for borrowing money, expressed as a percentage of the loan amount. Costs may include interest, fees or other expenses associated with the loan.
APR is calculated as the sum of the applicable fees, expenses and interest over the life of the loan expressed as a percentage of the loan amount. The APR will be higher than the interest rate if fees or other costs are charged for the loan.
If there are no additional costs or fees, the APR should be equal to the interest rate.
The interest rate of a fixed APR loan won’t change during the term of the loan—though in some cases it could change if you default. The interest rate of a variable APR loan, however, is typically based on an underlying benchmark interest rate that may go up or down, and therefore the interest rate of a variable APR loan can change as the underlying interest rate changes. Find out whether your APR is fixed or variable so you know if the rate will stay the same over the life of your loan.
QUICK TIP: All other things being equal, when you are comparing loans, the loan that has the lowest APR is usually the least expensive option.
APR, as opposed to interest rate, helps you evaluate the true cost of your loan, since an interest rate may not reflect the fees and costs associated with the loan.
Don’t hesitate to ask your lender what costs and fees are included in your APR.