You’re going to see the term “APR” on a terms and conditions document whenever you are dealing with credit cards, mortgages, personal loans, student loans, or any other financial product that involves an interest rate.
APR stands for annual percentage rate which is a numerical percentage at face value, and it typically applies to outstanding debt hence the financial products just mentioned. When you owe an interest payment on a loan or credit card, the value of that interest is calculated by the lender using the APR. In other words, the APR defines your interest payment on an outstanding debt balance. In fact, it is often confused with an interest rate, but it is NOT an interest rate technically speaking.
An APR gauges the TOTAL cost of a loan, mortgage, credit card, etc. The total cost of a loan product typically includes the interest rate, origination fees, transaction fees, and other factors that cost lenders money. So, an APR reflects certain expenses of a lender for maintaining a line of credit or outstanding debt, and lenders charge a certain APR to make back in interest for whatever expenses they have by giving you money.
That’s cool, important, and all, but it may not really matter to some people. It’s still going to hit you in the face as an interest payment on top of a principal loan payment. At the end of the day, it’s still just a number that costs you more when paying off any sort of debt.
On that note, a lower APR (so a lower percentage value) is considered a better deal on a credit card or loan product because it’s going to cost you less in interest payments. Contrarily, a higher APR is going to cost you more. That’s a pretty easy rule of thumb to remember for the rest of your life. Unless you like spending money for whatever reason, you’re going to want a low APR on a loan product as a borrower.
There it is. You know that an APR is a percentage taken from a loan balance to determine your interest rate, but that really isn’t the end of it though.
There are plenty of questions that still need answering.
How does an APR work when you’re paying off your loan? Why do lenders offer a range of possible APRs on loans? What the heck is a variable APR? Why can you only get offers with high APRs? Why does my neighbor have a lower APR than me and seem so much happier? How do you get a low APR?