What is APR? APR which is short for Annual Percentage Rate is the amount of money people pay to borrow money.
The Term APR is not only applied to normal conventional loans, it is also applied to credit cards, mortgages, and other forms of credit. It is very important to understand the concept of Annual Percentage Rates, and how they are calculated and enforced. This is the very reason this article is created.
What is APR?
APR in other words is more like the profit that loan organizations, institutions, and platforms make by giving you money. It is the price attached to every loan. I am very sure your question has been answered if you have asked the question ‘What is APR on a Loan or What is APR on a Credit card. Understanding APR properly will help you make the best decision in choosing, mortgages, loans, and different types of credit.
How Does APR Work?
The APR of a loan is a very important factor in how much extra money you pay back when paying back your loans or debts. In the case of a credit card, if you carry a balance from month to month, you will be charged, based on the APR for the unpaid portion. Most credit cards offer a grace period. If you pay off your balance on time each month, you will not be charged interest.
Now, let us look at the various types of APRs
Kinds of APRs
APRs can be fixed or variable. The write-up below will explain them in detail and give you the difference between them both.
Fixed APR is the type of APR that does not change throughout the life of your loan. This is more predictable and it makes budgeting a lot easier.
This is the type of APR rate that is tied to an index APR rate such as the prime interest rate. With this type of APR, changes are made according to the changes in the index rate. This means that the APR of your loan may be lower, but may finally increase when the index rate has been increased. This type of APR makes it kind of difficult for you to plan your monthly budget.
Types of APRs for Credit Cards
The different APRs differ according to the type of credit it applies to. The APR of a credit card is usually higher than that of a car loan or a home loan. And the way you use your card can affect the APR rates. These are the Types of APRs on credit cards.
As the name implies, purchase APRs are the type of APRs applied to your credit card when you make a purchase. This means that every purchase made on your credit card has an APR on its own.
Cash Advance APRs
This means the cost of borrowing money or cash from your credit card. This APR tends to be higher than the purchase APR. In this case, many transactions are considered cash advances, even if this cash never touches your hands. These types of transactions include purchasing lottery tickets, buying casino chips, or exchanging dollars for foreign currency. There is usually no grace period for these transactions, this means that you will have to start accruing the interest immediately.
This is the type of APR attached to your card when you violate the terms of your card‘s contract. These APRs are attracted by doing things like missing a payment or being late with a payment. When you do this, the APR on your card will increase for a period of time. To avoid these types of APRs, try to check your card‘s terms and any notice that is issued to you by your account.
Introductory or Promotional APR
Introductory APRs are promotional APRs that come with a new card. These cards come with a lower, limited-time APR. These types of APRs can also be applied to certain specific transactions like balance transfers.
Where can you find Your Credit Card‘s APR?
If you want to find your credit card‘s APR, it can be found on your account opening disclosures and your monthly credit card statement. in a lot of cases, you can find your current APR and determine whether it is based on the prime rate by looking at the section about interest charge calculation.
What is APR for Credit Cards?
APRs mean the same thing as credit cards, it means the price you pay for borrowing money on your card. The rate for credit cards is usually stated as a yearly rate. This is why it is referred to as the annual percentage rate. On most cards, these rates cab totally be avoided when you make your payments in full each month on or before the due date.
Average APR for Credit Cards
According to our studies, the average APR on a credit card in America today is 19.90%. but generally, your credit card‘s APR depends on how good your credit is. If you have really good credit, your APR will be around 16.26%, and if you have really bad credit, your APR will be around 23.53%. The figure for good credit according to FICO for Americans as of 2021 was 714.
What is a High APR for a Credit Card?
This information will help you make good financial decisions. As stated in the early part of this article, high APRs are usually caused by bad credit or very low credit scores. APRs above the normal average are the ones considered to be at the high end. the average APRS of credit cards ranges from 16.99% to 26.99%.
What is a Good Low APR for Credit Card?
On the other side, a good credit card’s APR is one that is lower than the average. The average, in this case, is between 16.99% to 26.99% The credit card approval on APRs is based on one very important factor, which is your credit score. People with very high credit scores are most likely to get lower APRs.
Good APR for First Credit Card
When you are obtaining a credit card for the first time, it is expected that you should get a lower APR. In most cases, the APR for the first card is anything below 20%. The best low-interest first-time credit card is the one that is issued by the Bank of America, the Customized Cash Rewards Credit Card for students. This Credit Card offers an introductory APR of 0% on purchases and balance transfers for the first 15 months.
What is APR Mortgage?
on your mortgage loan, the Annual Percentage Rate is the Total Amount of money or interest on your total mortgage loan amount that will pay every year. This simply means that a lower mortgage loan will lead to smaller monthly payments. Today’s mortgage rates contain both APRs and interest rates.
When choosing a Mortgage loan, go for a loan with the lowest APR. That is the best factor to consider. Although, mortgage loans with lower APR will attract other fees, and mortgage points.
APR vs Interest Rate
The concept of APRs and Interest Rates mean two different things. But they are not far apart. APRs are a broader way to look at the amount of money you pay when you take a loan or use your credit card. The APR contains both your interest rate and other fees that are attached to your loan. These other fees include brokerage fees, private mortgage insurance, and discount points. From the explanation above, you should understand that your APR must be higher than your interest rate.
Frequently Asked Questions
Read the next part of this article to know more about APRs on any line of credit.
What is a Good APR to Pay?
A good APR depends on the line of credit you are using it for. For a credit card, a good APR is 14% below. This APR is lower than the average APR for credit cards. 3.5% APR is very good for a 30 years mortgage loan. Right now, for a 15-year loan, a good APR should be in the high 3% range.
How Do You Calculate APR?
There are a few things to consider when calculating the APR for a loan. These things are the principal amount, the number of years the loan will last, and the extra charges that the loan incurs in addition to interest. This is how to calculate your loan‘s APR below
- Firstly, calculate the interest rate of your loan
- Add the administrative fees to the interest amount
- Divide your result by the loan amount or the principal amount.
- After that, divide your result by the total number of days in the loan term
- Multiply your result by 365
- After that, multiply by 100 to convert it to a percentage.
Hence, APR can be represented in a formula, such as
APR = ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100
This means that the individual will pay $28,306.88 in total, which means a repayment of the principal loan of $25000 and $3306 as interest.
What is 5.00% APR mean?
This is better explained with the use of an illustration. For example, if you take a loan of $25,000 to buy a car, and you have a fixed APR of 5%, it must be paid back over the course of five years. This simply means that the individual should pay about $470 monthly. This amount was obtained from the calculation above. i.E
Do you Pay APR if you Pay on Time?
For credit card users, you do not need to worry about APR if you make your payments on time. But if you do not pay your balance in full, you will be required to pay APR. In fact, many credit cards have APRs of 20% to 30%. This means that you will pay more in the end if you do not pay your balance on time.
Do you Pay APR Every Year?
Yes, as far as you have not cleared your debt. The APR rate is best expressed as the interest rate. This rate calculates what you are supposed to pay each year by making monthly payments into consideration. APR is also used in investments as the annual rate of interest paid on investments without accounting for compound interest within that year.
How do I Lower my APR?
There are so many things you can do to reduce the APR on your credit card. Maintaining good financial habits will help you make this possible. Here are good tips to help you
- Improve your credit score by paying your bills online, and keeping your balances low.
- Consider a balance transfer to a new credit card with 0% or a low promotional rate on balance transfers
- Pay off your balance
- Submit a request to your credit issuer to grant you a lower interest rate.
These are very good ways to reduce your APR.
How Much APR is Too Much?
An APR is considered too high when it is way higher than the average APR for that type of credit. For example, if the APR on your credit card is over 25%, it is considered too high when compared to the average rate of 16.26% for people with very good credit.
Can you Avoid APR on a Credit Card?
To avoid the APR on your credit card, you have two options. You can either pay off your balance before the grace period ends or apply for a type of credit card called zero-interest credit card. These cards offer 0% APR on purchases for up to 21 months. If you know you may not be able to pay your balance right away, take advantage of the 21 months full period of grace.
Is 10% a Good APR?
a 10% interest on a credit card is very good, but before you can get this type of APR, you may have to go to a local bank, or a credit union to find it. Apart from this value, any APR on credit cards below the average value of 16.26% is also very good.
Is a 29.9 APR Good?
Of course not, taking a card having such an APR is not a very good decision. It is a very high APR for a credit card. This type of APR is attracted by a very bad credit score. However, you can take this risk, if you are very sure to pay back your balance in full each month before it gets late.
Is 24.99 a Good APR?
For people with low credit scores, 24.99 is very reasonable for personal loans or credit cards. But if you are taking a mortgage loan, a student loan, or an auto loan, this value is very high. Even higher than what lenders will offer if you have a good credit score.
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