What Is APR?

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What Is APR?

Annual Percentage Rate or APR is the annual interest rate charged by lenders for money borrowed.  Borrowed money may be in the form of loans or from credit card purchases.  To make it easier for borrowers to understand various interest rate computations from different lending companies, the US Government passed the Truth in Lending Act, which requires the lenders to quote APR for loans offered to the public.

With APR, borrowers can now easily compare the different rates of different lenders. In the case of credit card companies, they are allowed to charge interest rates on a monthly basis.  But they are still required to quote APR on an annual basis before any agreement or contract is signed between parties.  So if the particular credit card company charges 1% interest rate per month, the total would be 12% for 12 months.  It is not uncommon for credit card companies to have different APRs for purchases, balance transfers, and cash advances.

There is also a term called “default APR”, which refers to the interest charged to a borrower if you default on your credit card terms.  Defaulting may result if you paid your dues after the due date, if your check payment is unfunded, or if your purchases exceed your allowed credit limit. APR can either be “nominal” or “effective”.  Nominal APR refers to interest rates declared on a particular loan.  Effective APR on the other hand, refers to interest rate plus additional fees.  Like in mortgages, total APR may include Private Mortgage Insurance and processing fees.  There are also “variable” and “fixed” types of APR.  Fixed types refer to rates that remain the same or “fixed” throughout the term of the loan.  Variable APRs meanwhile may change without notice and may be based on other lending-related rates. Since APRs include other fees added to the actual interest, careful evaluation is needed before signing any agreement with lenders.  Details must be known on every charge so one can make a sound decision in selecting prospective lenders.

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