When talking about financial matters, APR (or Annual Percentage Rate) is a term you’ll hear frequently. Understanding what APR means can be the difference between making a wise financial decision and being taken advantage of by a lender. To help you make informed decisions, here’s an overview of what APR is, and why it’s important.
What Is APR?
The APR is the annual rate of interest you’ll pay on a loan or credit card. This is different from the monthly interest rate you might normally see listed. Instead, APR includes additional fees and factors, such as the cost of origination and late payment charges. The APR gives you a comprehensive overview of the cost of borrowing money, and should always be taken into account when making a financial decision, whether it’s for a loan or a credit card.
Why Is APR Important?
When lenders, brokers, or credit card companies quote an “interest rate” without including the APR, it can be easy to make bad decisions. For example, let’s say you’re considering a loan with a 6% interest rate. You might assume 6% is the total cost of borrowing, but it might be lower or higher. That’s where APR comes in. By properly comparing the APR, you can see the true cost of borrowing the money and make an informed decision.
When taking out a loan or applying for a credit card, always ask for the APR and compare the APR between companies. This will ensure you’re making a wise decision rather than focusing solely on interest rates.