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What is an APR and how does an APR work?

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APR stands for annual percentage rate. This number tells you how much you will be charged in credit fees and interest each year that you have a loan. If your loan comes with a 10 percent APR, that means you will owe 10 percent of the loan amount each year, in addition to having to pay back the loan itself. In this article we’ll look at how APRs work and what that means for you. 

Here’s what we’re going to cover:

  • What is an APR?
  • What’s the difference between APR and interest rate?
  • What are fixed and variable APRs?
  • What is APY?
  • Oportun: Affordable lending options designed with you in mind
Key takeaways: How does APR work?

  • The annual percentage rate, or APR, tells you how much you will owe in fees and interest each year that you have a loan.
  • A lender determines what APR to charge, and might take into consideration your income, credit score, debt-to-income ratio, length of the loan, or other personal or non-personal factors.
  • The APR on a credit card is usually the same as the interest rate. On a loan, the APR will typically be higher than the interest rate because it includes fees.

What is an APR?

Lenders, like any other business, charge fees for their services. The annual percentage rate (APR) is a number that tells you the total cost of borrowing money, year by year. The APR on a loan includes the interest and some of the fees you will be charged, and is expressed as a percentage of your loan amount. The APR on a credit card is usually the same as the interest rate. 

The APR you are charged on a loan depends on several factors such as your income, your credit score, and your debt-to-income ratio. It may also depend on the length of the loan: A longer loan usually means a lower APR. Each lender uses its own calculations, so different lenders may offer you different APRs on a loan of the same amount.

Credit cards also have APRs, but they work a little differently. If you pay off your credit card balance in full each month, you won’t owe interest on your purchases, so the APR doesn’t usually apply. However, you may still owe interest on cash advances and some other transactions. Credit card APRs typically do not include the card’s yearly fees.

What’s the difference between APR and interest rate?

It’s easy to confuse annual percentage rate with interest rate. The APR on a loan includes interest, but it can also include charges such as legal fees, origination fees, and more. By law, the APR must be clearly stated in your loan agreement. 

If you’re considering loans from different lenders, it’s smart to look at both the interest rate and the APR. But it’s the APR that will tell you the total cost of a particular loan from a particular lender. That makes it the best tool for comparing loans with similar repayment periods. 

What are fixed and variable APRs?

A fixed APR is just what it sounds like: a rate that stays the same throughout the lifetime of the loan. A variable APR may change according to financial conditions. The lender can raise or lower the amount of a loan’s variable APR over time, but cannot change a fixed APR after you have signed a loan agreement.

Penalties for late payments are not included in loan APRs. If you don’t make your loan payments on time, you will be charged late fees in addition to the APR.

What is APY?

Another abbreviation you may see is APY, which stands for annual percentage yield.

While APR tells you what you will have to pay for a loan, APY tells you how much you can expect to get back from an investment. If your savings account has an APY of 3 percent, that means you will earn 3 percent of your bank balance in interest each year. This is a good way to determine which banking product will give you the best return on your money. Certificates of deposit (CDs) often have higher APYs than checking or savings accounts. 

Oportun: Affordable lending options designed with you in mind

Now that you understand what an APR is and how APRs work, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

  • Personal loans
  • Secured personal loans
  • Credit cards
  • And more!

 

Sources:

Experian. What is an APR?

Bankrate. What is APR on a credit card?

Experian. Personal loan APRs and interest rates: What’s the difference?

Consumer Financial Protection Bureau. What is the difference between a fixed APR and a variable APR?

NerdWallet. What is APY? Annual percentage yield definition and how it works

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