What Is APR? Understanding How APR Works

Annual Percentage Rate (APR) is the percentage amount of interest and fees that a credit cardholder or borrower will pay on a loan’s outstanding balance in a year. APRs can be applied to credit card balances, home loans, student loans, and personal loans. Credit card companies and money lenders add APR to loans or credit balances to calculate how much interest is owed, including any additional fees such as lender charges and interest charges. Some of the fees included in your APR when borrowing money could be origination fees (any processing fees for starting your loan), mortgage broker fees, private mortgage insurance, and closing costs.

APR represents a recurring amount of interest that a lender charges a borrower on the outstanding balance of a loan or line of credit. You can typically find your APR on your monthly credit card statement, which notes the dollar amount of APR you were charged for a given month. This amount of money reflects a percentage of your outstanding credit card balance.

APR is not typically the same for every individual. Borrowers with good credit scores (of 740 or higher) are more likely to be approved for a lower APR than those with low credit scores. Also, longer-term loans are likely to carry high APRs. This is because general interest rates are more likely to rise over a longer period of time. A long-term loan also makes it more likely that the borrower may default on the loan before the due date.

The two main types of APR are fixed-rate APR and variable-rate APR, which dictate whether or not the APR rate remains constant throughout the life of the loan. Beyond those two categories, there are a few different types of APR that you may hear about when you’re shopping around for credit cards.

1. 1. Fixed-rate APR: With a fixed-rate APR, the percentage rate is locked in at the beginning of the loan and stays fixed until the loan amount is paid.
2. 2. Variable-rate APR: A variable APR changes with the state of the economy. As the federal prime interest rate goes up and down, your APR adjusts. During a recession, your APR will drop. During times of economic growth when the prime rate is high, your APR rate will increase.
3. 3. Introductory APR: An introductory APR is a reduced APR that is offered for the first six to 18 months of your loan as a promotional incentive.
4. 4. Penalty APR: Penalty credit APR is applied to a cardholder’s balance when they make a late payment on a credit card or exceed their credit limit.
5. 5. Cash advance APR: Cash advance APR is applied to any money that a cardholder withdraws as cash from their credit account.
6. 6. Balance transfer APR: Balance transfer APR is applied to any amount of money when a cardholder transfers a balance from one credit card to another.
7. 7. Purchase APR: This rate is applied to any new purchases you make with your card, and can be fixed or variable.

Your interest rate refers to the percentage you pay on the loan or credit card balance, without including any additional fees that are included in the total APR. Your APR is the total interest you will pay, including the interest rate and additional fees. When comparing fees and APRs from different lenders or credit card issuers, it is important to differentiate interest rates and APRs to get a clear sense of the total costs associated with the loan.

Calculating the amount of money that you owe in monthly APR is easy. All you need is your monthly loan statement and a calculator.

1. 1. Find out your APR rate and your current loan balance. To figure out how much APR you owe, you will need to know how much you owe, and your percentage APR.
2. 2. Multiply your loan balance by your APR percentage. Calculate the amount of APR that you owe annually by multiplying your APR by the total amount of your loan. For example, if your APR is 14 percent on a $10,000 loan, your equation will be 0.14 x 10,000 = $1,400. This means that you will owe $1,400 for an entire year.
3. 3. Divide your yearly APR by 12 to get monthly payments. Once you have the number for your annual payment, simply divide that number by 12 to get your monthly payment amount. In our example, 1,400 divided by 12 would be $116.66. This means that you would owe about $116,66 a month in APR.

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