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If you’ve taken out a loan before, you must’ve heard about the term APR. And you might not be sure what it is.

What is an APR?

An APR or annual percentage rate tells you how much borrowing for a year costs, that includes interest and additional fees related to the loan. It’s easy for you to compare the cost of loans and credit cards once you know how much it costs or how an APR works.

Loans can vary in terms of interest structure, fees, and penalties. That’s where an APR can be useful as it provides the bottom-line number in which you can easily compare to rates that other lenders offer.

An APR is an annualized rate, which means, it shows how much interest you’ll be paying if you borrow for a full year. But what if you’re not borrowing for a year, or the amount you borrowed changed? Then you might need to do a little Math to get the accurate figure.

But in the end, a lower APR is definitely better than a higher one.

What is a 0% APR?

You might’ve seen this somewhere when hunting out for a loan. What does a 0% APR mean? A zero percent APR means that no interest will be charged to the money you borrowed. Usually these kind of offers are just bait to lure you in. Once lured in on the sweet idea of borrowing money for “free” that’s the time they charge you interest.

And you may think that you’re saving money because of the no interest, you might be getting hit elsewhere, such as paying other fees. It may be less than paying the interest, but you’re still paying something.

There might be a way to pay zero interest and take advantage of that zero APR deal. All you need to do is fully pay the loan off before the promotional period of the zero APR offer expires, otherwise you might get charged with sky-high interest charges.

What does a variable APR mean?

When an APR is variable, then it means that it can change overtime. Some loans, you exactly know how much interest you’ll be paying, how long your repayment timeline is, how much you’ll borrow, and the interest rate used in interest charges. But with a variable APR, it’s different. Your APR might be higher or lower in the next coming years.

And that is why a variable APR is risky, because it gives you that impression that you can afford to borrow with the rate you are given today, but you might end up paying more than what you expected. If that early low interest rate is worth the risk for you, go for it. But others don’t have the luxury of choosing. A variable APR might be their only option.

So what makes your interest rate change? Variable APRs rise when the interest rates in general rises. Your interest rates may also change due to some penalties, like failing to make payments, your rates can jump drastically.

What affects APR?

  • Type of loan: Some loans are more expensive than others and some are different types. A home loan often comes with lower rates because you are offering your home as a collateral. While an unsecured loan would have to pay more because of the increased risk.

  • Credit: Your credit history is an important factor in deciding whether you are eligible for a loan or not. If you have a good to excellent credit score and history, you’ll likely get offered the lowest APRs on most loans.

Ratios: Again, lenders only care about getting paid and avoiding a loss. That’s why a good Debt-To-Income and Loan-To-Value is important. Having a good ratio means you are well within your means to pay off the loan.

For first-time borrowers, the term APR will pop out more often than you’d like. Most likely, you’d get confused. Now, the APR certainly affects the total amount that you will be paying back. Read on for a more thorough guide to APR on loans.

What does APR stand for?

APR just means Annual Percentage Rate. Since it basically pertains to interest, the APR tells you about how much it’s going to cost you when you borrow for a certain year.

What does the APR tell you about the cost?

Let’s say you are going to borrow 500 worth of loan and your APR is at 10%. This means that in a course of one year, you are going to need to pay 50 to cover for your interest cost since 50 is the 10% of 500.

However, in reality of course, your APR can go way higher and thus, your total interest costs will too. In addition, the total charges can still go a little more complex since there are other factors you have to consider like compounding. Your interests costs will also most likely be spreaded throughout months or weeks.

If you are using credit cards and you want to find out more about your APR, you can usually assume that the rate will be on a daily basis as it will be charged on your balance every day.

What does 0% APR mean?

Borrowing for free may seem like a good thing. 0% APR basically means you are not going to be charged for borrowing but I normally advise against this as this can be a tactic to hook you in. Afterwards, lenders can just find more ways to charge you with more fees.

What does variable APR mean?

If it’s variable, then it just literally means that your rate will vary throughout the loan period. Variable APRs come with more risk since you don’t know for sure how much the interest rate will cost you in the future.

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