Annual Percentage Rate (APR) isn’t a technical finance term. Still, there are aspects that might confuse you if you're not a personal finance expert. Let's get through some of the important basics to help you understand more.
APR stands for "Annual Percentage Rate," which is the amount of interest that will apply on top of the amount you owe on a year-to-year basis.
So, if you have an APR of 30 percent, that means you will have to pay a total of $30 in interest on a loan of $100, if you leave the debt running for 12 months.
As another reference: If it were $10 in interest, that would mean the APR is 10 percent.
See How Your APR Is Calculated
Your APR rate depends on your creditworthiness, the type of credit you're applying for, and the current borrowing rates.
It's a proprietary calculation made by your credit card issuer or lender. If you are card shopping, you also should look at the purchase APR and balance transfer APR.
Once you apply, you might qualify for the card at a fixed interest rate. There could even be a no-interest period. However, some cards include a range of rates (usually three) and your creditworthiness determines which one applies to you.
Credit Card APR Rates
Remember, there are many types of APR that apply for credit cards, such as:
- Cash advance APR
- Purchase APR
- Balance transfer APR
- Introductory offer APR
Calculating Your Credit Card APR
Your credit card's monthly interest cost is determined by dividing your annual APR by 12. If you pay in different installment periods, just use the number of payments divided by 12 to determine your APR.
If your APR is 27.99 percent, then 2.3 percent is applied each month. So, a $1,000 loan would have a charge of $23 monthly, equating to $276 a year in interest.
Because the annual (nominal) APR isn't effective for calculating your realized interest costs, many people find APR confusing.
Now it gets even more confusing when you factor in the effective APR calculations. Your effective APR rate is the figure determined by your compound interest. This rolls in the interest that was applied to your card in previous months.
As a result, a high APR rate can make the amount you owe in interest inflate very fast.
The Difference Between APR and APY
Understanding an APR in Your Mortgage
This is the easiest thing to grasp. If you look at a home loan, the monthly payments are always the same. It's not like with a credit card, where you have purchase APR as well, so you can determine how much you will spend in interest ahead of time. This way, any set APR will be easy to understand in terms of realized costs for the consumer.
Credit APR Laws
There are some situations where a company cannot exceed a certain APR amount. For example, it was deemed that payday loan companies are charging their customers way too much.
When you're getting a credit card or a loan, the APR rate must be discussed with you upfront. This law is a part of the Truth in Lending Act.