What is APR?

If you have ever read your credit card statement, personal loan statements or mortgage documents, you may have come across the term APR. How many times have you wondered what is APR, what does APR mean, and how does it affect you?

APR stands for Annual Percentage Rate. The annual percentage rate is a culmination of an individual’s yearly interest rate and other miscellaneous costs that are incurred on a loan.

Borrowers need to know that APR is applicable on a credit card as well as a loan. It is a vital metric used by banks and other lenders. It is also significant to borrowers as it can help them select the right lender to avail themselves of a loan.

There are two types of APRs:

  • Representative APR: Representative APR is the average APR that a lender offers to a majority of its borrowers. This can include the interest as well as the processing fee, service charges, etc.
  • Personal APR: The personal APR is the interest rate charged to individuals based on their income, loan amount, tenure, etc. This may differ for different loan applicants.
Benefits of APR

Benefits of APR

Is APR important to borrowers? Before availing a loan, lenders tend to explain that apart from the interest rate, there are certain other costs and fees involved. This is where the importance of the APR rate comes in.

The APR rate is essential as it helps individuals understand the actual cost involved in taking an instant loan. These costs can include processing fees, service charges, documentation charges, pre-payment charges, etc. 

It is the total cost incurred on the loan and knowing the APR rate helps borrowers make informed decisions regarding the lenders and determine whether a loan should be availed from them or not.

One of the benefits of the APR rate is also that it helps individuals create a more financially sound budget so that they are not caught unawares by any expenses that may arise on their loan or credit card. 

How Does APR Work?

  • The APR gives the annual costs of a loan. It includes interest rates as well as other fees and charges. The APR is also indicative of the interest rates on credit cards and unsecured loans like personal loan

  • The lower the APR, the lower are the costs involved. This implies that a lender with a high APR can result in increased expenditure for the borrower.

How Is APR Calculated?

The formula to calculate APR rate is:

APR= [{F+ R)/ P } / n] x 365 x 100

 Where:
P= Principal amount

F= Fees

R= Interest rate

N= Tenure of the loan in days 

What Factors Affect Your APR?

Knowing what is APR is essential when applying for a loan. However, one must also know the various factors that can affect the APR rate. These are mentioned below: 

  • Credit score and history: An individual’s credit score and history can impact their personal APR. A high credit score can help in getting a low APR and vice versa.
  • Debt-to-income ratio: The debt-to-income ratio is the ratio of an individual’s gross income and debt. A lower ratio can help in getting a low APR.
  • Annual income: The annual gross income can impact a person’s debt-to-income ratio and is, therefore, a factor that affects the APR. Individuals with a high yearly income can quickly get a loan with a low APR.
  • Employment history: An erratic or unstable employment history can present a high risk for the lender. Therefore, if the borrower wants to purchase APR at a low cost, one must try to maintain steady employment. 
  • Loan terms: Some loan terms, such as a long tenure or a high loan amount, can increase the APR rate.

Conclusion

The APR is a significant factor when applying for a loan. Therefore, individuals must understand what APR is, how it is calculated, and what factors can impact it. 

Lenders like Finnable offer low-cost loans with attractive personal loan interest rates starting at 16%. Borrowers can avail low-cost education loan, wedding loans, home renovation loans, etc. in 3 easy steps from Finnable.

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