The APR, in short, is the annualized interest rate applied on a loan or a credit card. The APR charged by a lender is higher than monthly interest rate because APR includes all the fees associated with the loan.
Let’s consider an example. You have taken a loan of $600 from Chase for a term of 12 month with 5% interest rate. All other extra fees amount to $200. What should be the APR for such a loan? Well, it would be approximately 62% as per APR calculators.
Types of APR
- APR variable: The interest rate might change while you are paying back the credit.
- APR variable typical: The interest will change according to your credit score and the amount you borrowed.
- APR typical: The interest rate is fixed.
6 things you must know about APR
- APR may include tax fee, origination fee, points, credit report fee etc. But late fees and penalties are usually not a part of APR.
- APR can help you to track hidden fees. The monthly interest rate can often be misleading. Therefore, you should always compare APR on different cards to understand if a credit card company is charging you too much.
- According to FDIC law, a credit card company must disclose the APR before you sign the final agreement. Therefore, the company cannot hide any extra fees if you want to know the APR.
- Shop for APR carefully. If you can afford to pay off your balances in full every month then other associated fees may be more important than APR. On the other hand, choose a low APR card if you fear that it will be difficult for you to stay current on your payments.
- A card might have different APRs for individual features. For instance, it might have different APRs for cash advances and purchases.
- It is possible to negotiate with the creditors for a lower APR or lower fees.
Remember that APR is an important factor when it comes to comparing credit cards, but you should consider other factors (like the method used to calculate penalties) as well. Most importantly, you must make as much payments as possible every month so that you do not end up paying more on interest.