Definition: An Annual Percentage rate or APR is the annual percentage rate at which the lender charges you for borrowing money, whether the money is used to buy securities or services or mortgage debt. This figure is often called the cost of funds or the APR. The APR is often used to measure the profit of an investment or loan because it shows the amount of money the lender spents to obtain funds and whether or not the interest rates the borrower paid are acceptable under existing economic conditions.
APR is used as a unit of measure in financial calculations because it’s easier to understand and think about than other money measures such as interest, principal, or rent. For example, say you have a $10,000 loan and an APR of 13%. That means your payment each month will be $1,110.54.
Types of APR
1. Fixed APR
Fixed APR refers to the interest rate that a company will charge you no matter what the circumstances are when you pay off your debt. Under this type of interest rate, your payments are fixed and predictable, which can be a good thing if you want to quickly pay off debt or avoid interest charges in the future. This keeps interest rates low and profits for the lender in the long run by preventing payments that others would make if they were able to satiate their curiosity about what your loan payment might be. Fixed APRs are charged on your credit card bills whether you use them or not. They are intended to compensate your lender for the risk that credit card companies take when lending money. Fixed APRs can be set for both new and existing card accounts. Fixed APRs cannot be changed once set, so make sure you understand what they are before refreshing your account information.
2. Variable APR
Variable APR means the rate at which your balance pays off may increase or decrease from month to month, depending on whether you make scheduled payments or skip payments as required. But variable APR has a significant advantage: you can pay off your entire balance less frequently, leading to more savings over time. The big disadvantage of variable APR is that it can be challenging to understand just how much it will cost you, especially if you are unsure how much you can afford to spend each month.
The annual percentage rate is the rate your bank or other financial institution charges you for keeping a certain amount of money in your bank account. Sometimes this amount may fluctuate from month to month and year to year. The most common percentage that financial institutions charge is 3%. If you have $100 in your account, they will usually rate it at 3%. Banks will also rate accounts differently for different bonuses or guarantees that are available.
The annual percentage rate (APR) is the annual percentage rate at which the lender will lend for money borrowed. The lower the APR, the better. APRs range from 0% for small business loans to 22% for home mortgages, 36% for business loans, and 63% for investments. Lenders also consider your credit score when calculating your rate. However, some factors, such as the debt-to-income ratio, are less critical for excellent or excellent credit.
Before taking out a loan, borrowers should understand their borrowing terms, including what fees or charges will be added to their payment and how these will impact their ability to pay off the loan quickly once it is paid off. An APR isn’t something you get; it’s something you give. When you borrow money at a higher rate than what is available to you, it forces you to pay your principal more quickly than if you were borrowing at a lower rate. This incentivizes borrowers to seek out lower-cost loans.