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What Annual Percentage Rate (APR) Is Too High?

    

SUMMARY: Learn about the factors that lenders consider when determining the APR on a loan, understand what APR you can expect on a car loan, mortgage, or credit card and what APR is too high.

It’s not the most glamorous subject, but it’s an important one: your APR. Whether you are looking for a home loan or car loan, or opening a new credit card, you will pay interest on the money that you borrow until it is paid back. This is called the APR, or annual percentage rate. Knowing what is a reasonable APR, and what is a high APR will save you money and help you to more easily navigate the loan application process.  

How Do Lenders Determine APR?

The starting point for lenders to determine what APR to charge a borrower is called the “prime rate.” The prime rate is determined by the Federal Open Market Committee, and it is basically the lowest rate that you can find on a mortgage if you have an excellent credit score. For other types of loans, such as credit cards and car loans, an additional margin is added on top of the prime rate. 

When assigning an APR to a buyer, lenders consider more than just the prime rate. They need to know about the individual borrower, and how risky it will be to lend them money. Lenders look at your credit report to determine your credit score and payment history. They also consider your income, and in some cases, your cash reserves. Consumers with higher credit scores are offered lower APRs, while those with lower scores will pay a higher APR.

Average APR

Before you start shopping for any type of loan (yes, you should shop around for the best APR), it is good to know what the current average interest rates are. If you are looking to buy a home, a consumer with good credit here in Texas can expect to find a mortgage rate for a 30-year fixed loan around 2.73% as of June 2021, while the national average rate is slightly lower, at 2.68%.  If you need a vehicle loan and you are wondering what  APR is too high for a car, consider that the average APR for a 60-month loan on a new vehicle was 5.05% in May 2021. 

Credit cards are a little different. APRs vary widely, with banks commonly offering rates of 12 – 24%, depending on the type of card. Rewards cards often have higher interest rates than other cards that don’t offer as many perks. When looking at rewards cards, it is important to determine if the benefits of the card outweigh the higher interest rate. What is a high APR for a credit card for one person who carries a balance every month, may not be considered high to another person who pays their balance in full each month. No matter what type of loan you are looking for, knowing your credit score and whether it falls into the “poor,” “fair,” “good,” or “excellent” category can help you determine whether the APR you are being offered is reasonable.

How to Qualify For a Better APR  

There are always things you can do to improve your creditworthiness, and eventually, qualify for a better APR:

  1. Always pay your bills on time.
  2. Check your credit score and monitor your credit report.
  3. Keep your credit utilization below 30%.
  4. Keep credit card accounts open with small purchases, as long as they don’t have an annual fee.

Looking for a loan or credit card doesn’t have to be stressful. When you understand the factors that go into determining APR, and you know what the average rates are, you can be sure that you are getting the best rate available to you.

Looking for a credit card with a low APR? Consider a credit card with TDECU today.

Sources: 

https://www.nerdwallet.com/article/credit-cards/what-is-a-good-apr-for-a-credit-card

https://www.zillow.com/mortgage-rates/tx/#/location

https://fred.stlouisfed.org/series/RIFLPBCIANM60NM

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