APR stands for the Annual Percentage Rate, and it is usually used in reference to all types of loans from credit cards, to auto loans to mortgages. Most times you have signed legal documents without understanding what the term means.
While you may understand interest rates that are sometimes straight forward when calculating the cost of the loan, though the APR can be hard to understand.
In this review, we take a look at this term and try to explain it for you in ways that you can understand APR, so the next time you apply for a loan, you won’t be left wondering what the term means. Read on to learn more.
What Exactly Is APR?
This is actually the annual representation of your interest rate. For example, when applying for different credit cards, the APR is used to compare how expensive a transaction can be on each of the cards you are applying for.
It is important to consider things when talking about APR, such as how it is calculated, and how it is applied.
How Does it Work?
It is general practice for credit card companies to offer their customers some grace period for purchases. This is if you are able to make purchases and pay for them at the end of each month by the due date.
You will only be required to pay what you owe with no interest. But, if you opt to carry the balance on the card, then you may be forced to pay the agreed-upon interest, plus any other outstanding balance.
How Is it Calculated?
Most variable interest rates usually start by using the index, such as the prime rate, or the added margin. The result of this is the APR.
You can change the variable rate if the index rate changes. Some banks however offer a non-variable APR too.
How Do You Know How Much You Owe?
Banks use a formula in order to determine the amount of interest you may pay on your outstanding balance. They usually calculate this using the daily, monthly, and periodic rate.
Keep in mind that some accounts will have multiple APRs so the calculation can be applied for each one of them. The statement also gives you plenty of information on how to calculate the balance which is subject to the interest rate.
Different Types of APR
There are many different types of APR, which are based on how often you are using your credit card. When you select the card, it is a good idea to consider the different rates, in addition to your credit needs.
Purchase APR is applied to all credit card purchases you pay using the card. Cash advance APR is the cost of borrowing cash from your credit card, and it is almost always higher. There may be different APR for checks and other types of cash advances.
Penalty APR is usually the highest APR and it is mostly applied to specific balances when you are in violation of the credit card’s terms and conditions, such as failing to make a payment in time.
Introductory APR is usually a promotional incentive that is given to new cardholders, and it is usually the lowest APR. The intro APR is given for a limited time period, and can only apply to certain transactions, such as balance transfers, or cash advances.
So, as a credit card customer, bear in mind that understanding APR will help you evaluate promotions and offers. Generally, the APR cannot be changed in the first 12 months of receiving the card, however, it can change in the period if it was a promotional APR only.
You must always review all credit card terms and conditions, and most especially the APR before signing on the dotted line.