What Is An Annual Percentage Rate (APR)

The annual percentage rate (APR) represents the total cost of borrowing money, encompassing both the interest rate and any additional fees or charges incurred during the loan's term.

Oct 20, 2024 at 12:35 pm

What is an Annual Percentage Rate (APR)?

An annual percentage rate (APR) is 1. the cost of borrowing money expressed as a yearly percentage of the loan amount and 2. includes not just the interest rate, but also all other charges, such as points, fees, and closing costs.

How APRs Work

When you borrow money, such as a car loan or a mortgage, the lender will charge you an interest rate. This interest rate is used to calculate the amount of interest you will pay over the life of the loan. The APR is the interest rate plus any other fees or charges that you are required to pay to get the loan.

3. The APR is expressed as a percentage, and it is calculated by taking the total amount of interest you will pay over the life of the loan and dividing it by the amount of the loan. The result is then multiplied by 100 to get the APR.

Example of APR

For example, let's say you borrow $10,000 for a car loan with a term of five years. The interest rate on the loan is 10%. You also have to pay a $500 application fee and a $250 closing fee.

4. The total amount of interest you will pay over the life of the loan is $2,500. The total amount of fees you will pay is $750.

5. The APR is calculated as follows:

APR = (Total interest + Total fees) / Loan amount * 100
APR = ($2,500 + $750) / $10,000 * 100
APR = $3,250 / $10,000 * 100
APR = 32.5%

Why APRs are Important

6. APRs are important because they allow you to compare the cost of different loans. By looking at the APR, you can see which loan will cost you the most in the long run.

APR vs. Interest Rate

The APR is different from the interest rate. The interest rate is the cost of borrowing money, while the APR is the cost of borrowing money plus all other fees and charges.

When to Use APR

You should use APR when you are comparing different loans. By looking at the APR, you can see which loan will cost you the most in the long run.

How to Get the Best APR

There are a few things you can do to get the best APR on a loan:

Compare multiple lenders
Shop around for the best rates
Negotiate with the lender
Get pre-approved for a loan

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