The yearly cost of borrowing money expressed as a percentage. It represents the total interest and fees a borrower will pay on a loan, credit card, or mortgage over a year. Unlike the Annual Percentage Yield (APY), APR does not account for compound interest.
How APR Works
APR is calculated using the following formula:
Loading formula...Where:
- Interest = The total interest paid over the loan term
- Fees = Any additional charges or fees included in the loan
- Principal = The original loan amount
For example, if you borrow $10,000 with an APR of 5%, you will owe $500 in interest per year, assuming no additional fees or compounding.
Types of APR
- Fixed APR – Stays the same throughout the loan period, making payments predictable.
- Variable APR – Changes based on market interest rates, meaning your payments can fluctuate over time.
- Introductory APR – A temporary low or 0% interest rate offered for a limited period (common in credit cards).
- Purchase APR – The interest rate applied to purchases made with a credit card if the balance isn’t paid in full each month.
- Cash Advance APR – A higher interest rate charged when withdrawing cash from a credit card.
Many people confuse APR (Annual Percentage Rate) and APY (Annual Percentage Yield), but they serve different purposes:
APR
APR applies to loans and credit and does not factor in compound interest.
APY
APY applies to savings and investments and includes compound interest.
If you’re borrowing money, a lower APR is better because it means you’ll pay less in interest. If you’re saving money, a higher APY is better because it means your savings will grow faster.
Why APR Matters
Understanding APR is crucial when comparing loans, credit cards, and mortgages. A lower APR means lower borrowing costs over time. Always check whether the APR includes fees and whether it is fixed or variable before taking out a loan.
Key Takeaways
- APR represents the total yearly cost of borrowing money, including interest and fees.
- It does not account for compounding, unlike APY.
- A lower APR means lower borrowing costs.
- There are different types of APR, including fixed, variable, and introductory rates.
When shopping for a loan or credit card, always compare APR rates to find the best deal and avoid paying unnecessary interest!
Additional Acronyms for APR
- APR - Accreditation in Public Relations