What Is Annual Percentage Rate, and How to Get the Most From a Loan?

The average personal loan’s interest rate is around 14.47%, but the figure may look higher on your documents than it actually is. That’s because you’re seeing the annual percentage rate on loan applications and forms.

But what is annual percentage rate? How is it different from interest and why is this distinction important?

Read on to answer these questions and learn the ins and outs of loan terms.

What Is Annual Percentage Rate?

Annual percentage rate (APR) is the yearly rate that a lender charges borrowers for taking out a loan. This means that it’s a figure stating how much interest a loan will accrue in a single year.

Let’s say that someone takes out a loan for $1000. The loan has an APR of 10%. This means that at the end of the year, the loan will have accrued $100 in total interest.

When you take out a loan, the lender is required to disclose the APR before you sign anything. This means that you’ll always know the amount you need to pay back in advance.

Is This Different From an Interest Rate?

“APR” and “interest rate” are often used interchangeably. They are similar in some respects, but the interest rate is less specific.

They’re the same in that an interest rate tells you how much interest your loan will have. It’s a percentage of the loan. A $1000 loan with a 10% interest rate will charge an extra $100 in interest.

This interest rate is the same regardless of how long it takes to pay off the loan. If you take 4 months to pay off the $1000 loan with $100 interest, you’ll pay $1100/4 each month ($275/month). If you take one year, you will need to pay $1100/12 ($92/month).

This is not the case for your APR. An APR is annual, which means that your 10% fee is $100 per year until you pay off the loan. So, if it only takes you 1 year to pay off the loan, you’ll only need to shell out $1100, but you’ll need to pay $1200 if it takes 2 years.

APR is also different from an interest rate in that it’s all-inclusive. While interest only takes the interest rate into account, APR includes any additional fees and costs associated with the loan. This often includes an origination fee.

This means that APR is a more accurate representation of what you’ll need to pay than your interest rate is. It’ll be a higher figure, but it’ll be the one you need to look at when determining what you need to pay.

Types of APRs

There are two main types of APR: nominal APR and effective APR.

The nominal APR is basically your simple interest rate per year. It isn’t a flat percentage, but it’s the amount that the interest would grow annually. It’s distinct from effective APRs in that it doesn’t include any fees or other costs.

The effective APR is what you need to know about. It includes the fees alongside the compound interest rate. This interest rate will have been calculated across the course of a year.

This is the rate that lenders need to disclose as a standard consumer protection requirement.

Calculating Effective APR

Effective APRs are calculated as follows: (rate for a payment period) x (number of payment periods in a year).

Let’s say that you have a $1000 loan with a 2% monthly APR rate. There are 12 payment periods in the year. Your effective APR would then be 2 x 12 for an overall 24% APR.

You would receive $1000 upon applying for the loan. If you were looking at simple interest rates, the expectation would then be that you pay back a total of $1240.

However, this doesn’t tell the full story. You may have an origination fee of $100. If you’re late on a payment, you may also accrue an additional $40 fee.

In this case, you will be expected to pay back a grand total of $1380. Your effective APR is 38%. 

What Determines APR?

There are a few factors that will determine your APR. When you borrow from a traditional bank or credit union, your credit score will be a primary consideration. Those with lower credit are considered riskier borrowers and will have significantly higher APRs than those who have high FICO scores.

However, this isn’t the case for those who apply for no credit check loans. If you have bad credit or simply haven’t had the chance to build any yet, you can get payday loans without a hard inquiry. FastLoanDirect will pair you with a lender that doesn’t discriminate based on credit score so that you’ll be approved and accepted for emergency funds.

In these situations, your APR will be determined by different factors. The first is your income.

Most payday loans require borrowers to have a steady source of income to protect the lender. After all, people won’t pay back a loan if they don’t have any money. If you make $5000 monthly, you’re going to have a lower APR than someone who makes only $2000 monthly.

Your payment period will also determine your APR. FastLoanDirect’s partner lenders have plans beginning at 91 days and ending at 72 months. If you plan to pay your loan back over 3 months, your APR will be lower than someone who’s going to take 6 years. 

This is simply because you’re working with the lender for a longer period of time. They’ll collect more money from you because they don’t have their money back yet. The goal is to get it back more quickly.

Because APR also includes fees as well as interest, working with a lender longer also means accumulating more fees. It’s natural that your APR would be higher. It includes more overall costs.

Is APR Negotiable?

In some cases, you may be able to negotiate your APR after being paired with a lender. You’ll need to communicate with them directly about it. Since FastLoanDirect only works with lenders that pre-approve you, you don’t need to worry about rejection because you ask questions.

However, in most cases, you won’t be able to haggle for a lower APR. The best you can do is clarify why your APR is what it is. It’s good to understand why your loan terms are as they are so that you can feel more confident in your decision to take out a loan.

There is good news, though: you will be able to negotiate your loan repayment plan. 

Lenders want to get all their money back with interest. It’s in their best interests as well as yours to give you a repayment plan that works for you. You’ll be able to tell them how much you think is feasible for you to pay back on a monthly basis.

Make sure that you’re realistic about how much you can shell out each pay period. You don’t want to make late payments or, worse, miss payments. This could seriously impact your credit score, slap you with ridiculous fees, and eventually cause you to default on the loan.

On the flip side, paying back your installments on time will increase your credit score. So be careful with what your loan repayments look like and make sure that they’re realistic. Lenders will work with you to come up with a plan that works.

How to Apply for a Payday Loan

Applying for a personal loan is easy when you work with FastLoanDirect. All you need to do is fill out our simple online form.

You’ll tell us how much you want to borrow. This sum can be anywhere between $100 and $35,000. This will then lead into a series of prompts that help you put personal and financial information into our secure portal.

You’ll give us your name, contact information, and address. You also will tell us your monthly income and checking account information.

Note that there are some required documents that you’ll also need to upload. A state ID or driver’s license will prove your identity and show us that you’re a US citizen or permanent resident. It will also prove that you are over 18.

At this point, we’ll pair you with a lender that agrees to take you on as a borrower. Everyone we partner with has a consistent track record of trustworthiness and reliability. You’ll get in touch with this reputable lender and talk to them.

It’s at this point that you’ll negotiate loan terms and compare personal loan options. Once you’re done, you’ll sign your documents, and voila! Your loan’s full sum will be direct-deposited into your checking account the next day.

Get Started

So, what is annual percentage rate? In the end, it’s a core consideration to take into account when you take out a loan. It determines the ultimate sum that you’ll need to pay back during your payment period.

Now that you know the basics of interest rates and APR, it’s time to get started. FastLoanDirect is committed to offering quick and easy loans at the lowest possible rates. Fill out an online application to get started with emergency cash.