If you have ever taken out a loan from a bank, or opened a credit card, you have probably heard the term APR. The scary thing about this term is that most people have heard it and don’t know what it means to them and their money. When you take out a loan, it’s important that you understand each and every part of what you will be paying back, to make sure you are not signing on something that will end up costing you large amounts of money. Use the following information to better understand APR before you borrow any more money.
What Is APR?
APR is short for annual percentage rate. This is one of the ways to compare the costs of taking out a loan. APR is not an exact science, but it gives you a standard to compare different percentage costs on different loans. APR gives you the ability to figure the cost of your loan in terms of a percentage. For example, if you borrow money at an interest rate of ten percent, you will pay ten dollars every year for every one hundred dollars you borrow. The best way to look at this term is to remember that you want the lowest APR rate possible, to allow you to pay the least amount of interest on your loan.
Differences With Loans
APR is figured differently for different types of loans. For example, the APR on a mortgage loan might include mortgage insurance, fees and points. Because of this, you have to look closely at an APR to determine how much you will pay over the life of your loan. The best way to use APR is to assume it is a general idea of how much you will pay, and not expect an exact amount. If you need a complete total, you will want to discuss this with your lending institution.
Fixed Versus Variable
A fixed APR rate will remain the same throughout the life of the loan. But in the case of credit cards, the rate may be changed as long as you are given notice 45 days in advance. A variable APR rate will change without your notice throughout the life of the loan. Variable rates are based on another interest rate, such as the prime rate. Before you sign your paperwork, you will know what type of rate you are getting. You may get a lower rate for a variable APR, but remember that this rate can change without your knowledge, and may be considerably higher by the end of your loan.
The banker who is handling your loan can answer any questions that you have in detail. Don’t be afraid to ask questions, and remember that it is your money that will be applied to the loan.