Understanding Interest Rates: How APR Works

American consumers don’t always know exactly what’s going on in their wallets. In fact, one in five don’t know whether they have credit card debt at all. When it comes to things like personal finance and understanding interest rates, we can all use a little refresher course once in a while. 

One of the most basic aspects of personal debt is the interest rate associated with it, the APR. Curious to learn more about APR rates and how they function? Read on to learn everything you need to know! 

What Is Annual Percentage Rate (APR)?

The annual percentage rate (APR) is essentially the cost to borrow the amount you owe to creditors on a yearly basis.  

Creditors are required to disclose their APR to you before you sign on the dotted line. Nearly every type of credit product you utilize has an associated APR. This includes credit cards, mortgages, auto loans, and personal loans. 

APR Versus Interest Rate

A credit product’s APR and interest rate are not always one and the same. The interest rate refers to how much your lender or credit card company charges you to borrow. APR is the annual cost to borrow, including the interest rate and the associated fees or discounts.

For this reason, the APR is higher than the interest rate. It is not inclusive of all possible fees, however, so be sure to check the fine print to see what else you might end up owing. Credit card companies typically have APRs equal to their interest rates, and some loans may do this as well if they don’t charge any fees.

How Is APR Calculated?

This might seem like a straightforward question, but the answer is, it depends. APR is calculated differently depending on the credit product, for example, credit card companies calculate it differently than mortgage lenders. 

In order to correctly calculate your APR, you’ll need to know your total interest charges, fees, your loan amount, and the number of days in the loan term. Add the interest charges and fees together, and divide them by the loan amount. Divide that total by the number of days in the loan term, then multiply by 365, and then multiply that total by 100. 

You don’t have to do all of this math by hand, however. There are many APR calculators online that can help you get a better idea of your APR for a loan. 

If you want to find the APR for a credit card, divide your credit card’s APR by 365, which gives you your daily rate. Find your average daily balance and the number of days in your billing cycle. Finally, multiply your daily rate by your average daily balance by the days in your billing cycle.

Types of APR

You know what APR is, but did you know that there are multiple types of APR? Depending on the credit product you’re using, it may have fixed or variable APR. 

Variable APR

Variable APR is pretty common in today’s financial marketplace. You see them with credit cards and adjustable-rate mortgages. It might start with a prime rate and then increase or decrease depending on your credit or the market.

Some products also have introductory offers that allow for 0% APR for a short period of time. They might also have higher APR rates if you miss a payment.

Fixed APR

Products with fixed APR rates won’t change throughout the life of the product. These include things like auto and home loans. When you sign up for the loan, you agree to that rate for the entirety of the loan.

Why Does It Matter?

If you haven’t given a lot of thought to interest rates or APR, then you might wonder why it matters, to begin with. After all, if you have an affordable payment, isn’t that good enough?

Shopping around for better loan rates might sound like a hassle, but the truth is, getting a better APR can save you a ton of money in the long run. The more you pay to borrow the money, the less money you’ll have to put away in savings or spend on home repairs. Even worse, if the APR is variable, it could take a pretty big chunk out of your budget.

Representative Versus Personal APR

Have you noticed that many companies advertise super low credit card rates, but when you apply, your APR rate is different? That’s the difference between representative and personal APR. 

Representative rates are advertised rates that the majority (51%+) of their customers receive, but not all. The personal APR rate is the rate that you are offered by the lender or credit card company. It can be higher or lower than what was advertised, depending on your credit.

How to Get Lower APR Rates

Feeling motivated to get yourself into a loan product that has a sweet APR? The best thing you can do for yourself is to work on your credit long before you apply for that loan. 

Credit card debt is on the rise, and most Americans have at least $6,200 in debt. Ideally, you’d like your utilization to be no more than 30 percent of your overall credit. Make sure you’re making your payments on time, and square away any collections items. 

Improving your credit takes time, but it is the best way to ensure that you get optimal loan rates.

Understanding Interest Rates Doesn’t Have to Be Complicated!

If you want to stay on top of your personal finance game, then understanding interest rates like APR is a key element. Ideally, you want to ensure that all of your loans and credit cards have a low APR to save yourself a good amount of money while you’re repaying them. Improving your credit and making on-time payments is the best way to ensure that you can ensure prime interest rates.

Now that you know all about loan rates, are you ready to shop for a personal loan that works for you? We offer loans through various lenders with interest rates as low as 5.99%! Visit our website today to get started!