What is Annual Percentage Rate

Annual Percentage Rate or APR is the yearly interest rate charged on borrowed money or earned through an investment, expressed as a percentage. This figure represents the cost of borrowing money on an annual basis, however, don’t miss out on the various fees incorporated to paint a clear picture of what you’ll ultimately pay as APR in the long run. If you’ve ever considered taking out a loan, from mortgages to credit cards, then you’ve probably come across an annual percentage rate or APR.

Key Points about Annual Percentage Rate

APR shows the proportion of a quantity relative to 100. For instance, if a 20% interest rate is charged on a loan, that means that 20 cents is charged on every dollar borrowed. However, an annual percentage rate goes the extra mile by annualizing various costs, thereby, reflecting the actual interest rate and the fees paid over the year. This simply means that relying on interest alone could be misleading. For instance, a credit card with a 12% interest rate and a $150 annual fee means that the customer will eventually pay an APR exceeding 12% after factoring in the $150 fee amortized over a year. This will add about 10% to the total cost. In other words, APR consists of all the relevant charges in a single, standardized metric. 

Generally, APR is used by businesses and individuals for comparing loan offers. Imagine bank A approves you for a $10,000 auto loan at a 6% interest and bank B approves you the same amount at 5.2% income with a $500 original fee. While Bank A has a higher interest rate, the APR paid to Bank B will be close to 8% when you factor in the fee, thus, less favorable compared to Bank A. In other words, APR enables businesses and individuals to have an “apples-to-apples” analysis of loans irrespective of their design. 

Overall, the APR serves as a benchmark for gauging borrowing expenses. It’s an eye-opener to financial elements that are not always obvious. I would recommend that you use APR in conjunction with other loan details to make informed decisions about long-term financial budgets.