About APR

APR is the standard abbreviation for annual percentage rate, which is the way in which interest is expressed on a loan or line of credit. When you know the APR, you can compare different lenders and loan options more easily, especially since it includes both the interest on the amount of money you borrow and any inherent fees. In many cases, this number is specific down to a tenth of a percentage point, such as a 9.9% APR.

The Facts

Consumer protection laws require that lenders disclose the APR on a loan or line of credit before they can process a credit application. This is so that consumers have an opportunity to compare interest rates and ensures that there are no surprises when a customer receives his first bill.

However, it is important to realize that an APR can change over the life of some loans and lines of credit. For example, a credit card provider might increase the APR if a customer makes a late payment or exceeds his credit limit.

Identification

Depending on the type of loan or credit offered, the APR is usually advertised clearly, often as a selling point. When you are pre-approved for a credit card the APR might be the first thing you see when you open the letter you receive in the mail. If it isn't immediately visible, it is fairly easy to find. On credit card applications, you'll usually find it on the back in the first box on the terms and conditions section.

Features

Many credit cards and other types of personal loans and lines of credit come with an introductory APR, which may last anywhere from six months to a year. This is a marketing ploy that might influence the types of loans you choose. For example, a credit card might have an introductory APR of 0% for six months, but increase to 11.9% after that period is over.

Size

The amount of the APR you are offered will depend on a number of factors, including the particular type of loan, your credit rating and any previous experience you might have had with the lender. In many cases, there is a large difference between the APR you receive at the beginning of the loan and the APR you'll receive if you happen to default. For example, a credit card might have a starting APR of 10.9%, but in crease to 24.9% if you make a late payment.

Function

An APR is imposed by a lender as a cost of borrowing money. When you buy a house, for example, you put a down payment on the principal of the cost, then pay interest on subsequent monthly payments toward that principal. This is the way in which lenders make money from borrowers, even though the lender might make money in other ways, such as charging fees.

Significance

Any time you need to borrow money, whether for a house or a car, you will need to understand the meaning and function of an APR. This will allow you to select the right lender for you, and will help you avoid predatory lenders who charge too much interest despite your credit rating. A general understanding of APR and how it works will save you thousands of dollars over the course of your life, and is essential if you need to borrow money to buy the things you want.

Type

It is important to realize that the characteristics of an APR will change depending on the loan or credit for which you are applying. A fixed APR is common on credit cards and on some mortgages and personal loans, and means that the interest rate won't change over the life of the loan. A variable APR means that the interest rate will fluctuate depending on market factors. For example, an APR might be a number plus the prime rate, which means that the interest changes depending on where the Federal Reserve has set the prime rate.