How annoying is finance in how it uses acronyms for everything? Finances are already complicated enough - why make it so we need a dictionary to understand the simplest things about our wallets? For everyone too embarrassed to ask, we thought it would be great to break down one of the most quoted acronyms - APR.
The basics of an APR.
APR stands for "Annual Percentage Rate," which is the annual rate of interest that is charged on a loan or credit card. The APR includes the interest rate, as well as any fees or charges that may be associated with the loan or credit card, such as application fees or annual fees.
The APR is expressed as a percentage and is used to compare the cost of borrowing money across different lenders or credit card issuers. Generally, a lower APR is preferable, as it means that the cost of borrowing money is lower.
For example, if you borrow $1,000 on a credit card with a 15% APR, you will owe $150 in interest charges for the year (assuming you do not make any payments during that time). However, if you borrow the same amount on a credit card with a 20% APR, you will owe $200 in interest charges for the year.
The APR may not always reflect the true cost of borrowing
APRs often do not include all fees and charges associated with a loan or credit card. For example, some loans may have application fees, prepayment penalties, or other charges that are not included in the APR. This can make the true cost of borrowing higher than the APR suggests.
Also, some lenders may offer promotional rates that are lower than the standard APR. These rates may only apply for a limited time, such as six months or a year, after which the rate increases significantly. Borrowers may be attracted to the low rate without fully understanding that it is only temporary, and they may end up paying more in interest in the long run.
One of the biggest crimes about APRs is that some loans and credit cards have variable interest rates that can change over time. This means that the APR may be accurate at the time of application, but it may change later, making it difficult to predict the true cost of borrowing.
Additionally, APRs can be misleading when comparing loans with different terms. For example, a 5% APR on a 10-year loan will result in more interest charges than a 6% APR on a 5-year loan, even though the APR is lower in the first case.
APRs are often advertised as a range, with the lowest rate available to borrowers with the best credit scores. Borrowers with lower credit scores may be offered a higher rate, which can make the true cost of borrowing significantly higher than the advertised APR.
In summary, APR is the annual rate of interest charged on a loan or credit card, and includes any fees or charges associated with the loan or credit card. It is used to compare the cost of borrowing across different lenders or credit card issuers, but it may not always reflect the true cost of borrowing.
Peach out ✌️