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Understanding the APR (Annual Percentage Rate)

APR, or annual percentage rate, is the total amount that is charged to a borrower if that borrower does not pay the balance before interest builds. In essence, it’s the cost of taking out a loan, and therefore represents the total cost of a loan or line of credit. Oftentimes, APR doesn’t necessarily just represent the interest of a line of credit. It often represent other fees and charges a company may tack on. So when you’re rate shopping, looking at a card or loan’s APR should provide you with a baseline comparison, and let you know which one is the more affordable option.

Adjustable versus Fixed APR

An adjustable (or floating) APR can change. Credit cards often use floating APRs. When this happens, the APR is ‘set’ for a certain period of months, but will change when the US prime rate changes. Some mortgages have such adjustable rates. With these, an APR is established for a set period of time, but once during the loan term the APR may be adjusted to match current rates. Credit cards often use adjustable APRs, which changes as the prime rate changes. Oftentimes, borrowers end up paying more APR than they did when they first got the card, but on occasions can pay less.

A fixed APR is what it sounds like. No matter where a borrower is with the loan, he or she will pay the same APR as he or she did at the beginning. Fixed APRs are best utilized with car loans, mortgages, or student loans, so borrowers know exactly what their monthly payments are going to be at any point during the loan term.

What sort of things determine a borrower’s APR?

As discussed above, one thing that determines a borrower’s APR is the US prime rate. Whatever rate banks are lending to one another will affect the APR you, in turn, receive because on top of that number is also whatever your lender will charge, too.

Another major factor in determining your APR is what credit score you have. A low credit score causes a borrower to receive a higher APR. This is because that borrower is considered riskier to lend credit to than someone who has a strong credit score. Likewise, if a borrower has a good credit score, he or she will not have as high of an APR as he or she would with a poor score.

Special circumstances

Sometimes lenders will charge different APRs for different transactions. For example, a borrower may have a zero APR for a set period of time if they transfer their balance over to a new card.

Writer

Lauren Ward is a widely featured author with her work gaining a presence on top media outlets like Huffington Post, Kiplinger, and CBS News. She has been in the content writing business for almost a decade (9 years of experience and counting) and writes attention-grabbing content focusing on real estate, lending, and personal finance. She has worked with various national non-profit organizations and at Federal Reserve Bank of Richmond. Read more >

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