APR: Definition, Simple Guide Explained(+ how it work)

APR definition is so important to understand. Each time you borrow money, the interest paid increases the cost of things bought with that money. Meanwhile, a credit card is a method of loan. So knowing your credit card APR can help you compare transactions and understand the cost of using plastic payments.

Basically, APR is also useful for comparing credit cards, loan offers, and other financial decisions making. Therefore, in this article, you will find everything you need to know about APR, the definition, how it works. Also, it explained the APR calculator, what is good APR, and many more. So, sit back, read, learn and apply. Thank you!

What is APR?

The annual interest rate (APR) definition of a loan is the total amount of interest paid each year (without compound interest). Meanwhile, it is expressed as a percentage of the loan balance.

For instance, with a 30% APR loan, you can pay about $300 a year for every $3,000 you borrow. Nevertheless, the loan or credit card with the lowest annual yield(APR) is usually the cheapest. However, it is advisable to ask your lender what their APR is before signing any credit agreement.

Interest Rate vs APR

Interest rate and annual interest rate are two terms that are easy to confuse. They refer to similar concepts, but there are subtle differences in their calculations. When evaluating loan costs or loan size, it is important to understand the difference between the advertising rate and the annual interest rate (APR), which includes any other costs or expenses.

Both interest rate and APR definition refer to the annual cost of a loan to a borrower which is expressed as a percentage. But, the difference is APR includes other charges or fees such as mortgage insurance, most closing costs. It also include discount points and loan origination fees, unlike interest rate.

Read Also: Investment: Definition, Types, Best Guide for optimal Result (+ how it work).

Moreover, APR aims to provide you with detailed information about the actual payment. According to the Federal Loan Truth Act, every lender must publish an APR and follow the same rules to ensure the accuracy of APR. So borrowers can use APR as a good criterion for comparing specific lending costs.

Therefore, you have to evaluate carefully when looking at the interest rates by lenders. Compare the APR of a loan with the APR of other loans to make a fair comparison of total costs. Also, make sure you compare the actual interest rates too.

How does APR work?

APR is expressed as an annual interest rate. Therefore, APR helps you to calculate the percentage of principal you should pay annually after considering your monthly payments and other related factors. But, you have to note that the actual annual rate is also the year you pay for investments that are not included in compound interest for the year.

The APR only includes mandatory fees. Please read the terms of use carefully before applying for your credit, as some fees, such as payment protection, may not be taken into account.

APR also doesn’t cover late payments or fines for overfunding.

What is APRC?

APRC represents the annual rate. Lenders should always quote APRC when raising their lending rates. As it is a standard rate calculation designed to reflect the total amount of interest paid over the entire loan term. You also need to take into account the fees borrower must pay to get a loan. Such fees include loan fees, valuation, and statutory fees over the duration of the loan. The purpose of APRC is to help you to compare your actual borrowing costs.

APR Calculator

APR calculator is of two categories, the basic APR calculator and the advanced APR calculator. Below, explained more of these APR calculator categories.

#1. The Advanced APR Calculator

The advanced calculator for APR help finds the effective annual rate (APR) on the loan (fixed mortgage, car loan, etc.). It actually allows you to specify the compound interest and payment frequency options. However, it helps you also to find the annual loan interest rate by entering the amount of the loan, the interest rate, and the number of payments. You can also create an amortization schedule for the principal and interest payments on the loan.

#2. Basic APR Calculator

This basic APR calculator can find the effective annual rate (APR) of a loan such as a mortgage, car loan, or fixed-rate loan. APR is the average interest rate for a loan over 12 months.

To find the loan’s annual interest rate, enter the loan amount, interest rate, loan term, and loan fee. You can also create an amortization schedule for loan principal and interest payments. Meanwhile, check out calculator soup for basic and advanced APR calculations.

What is APR on a Credit Card?

APR is considered active when paying a monthly credit card bill via an online portal or a plain paper statement that is mailed attached to a check. So what is credit card APR?

For credit cards, APR usually refers to the interest applied to your account during a specific billing period. In most cases, it’s effective if you have an unpaid balance on your credit card. It can also apply to the following transaction rates below.

  • Late payments or penalty APR
  • Cash advances
  • Balance transfers

Meanwhile, every credit cardholder should understand how APR works as it can apply to them. Perhaps, it is more important to know how good financial habits can help you avoid APR credit card issues. However, to avoid paying interest on purchases, you need to cultivate the habit of paying your balance in full each month by the due date.

Read Related: Money Management: Definition & Simple Guide (+ tips & pdf).

APR Calculator for Credit Card

Generally, with credit cards, APR is calculated using a fairly complicated formula. Which is: daily rate X average daily balance X days in billing cycle = credit card interest.

  • First, you have to divide your credit card’s purchase APR, also called go-to APR, by 365 (the number of days in a year). For example, if your APR is 18 percent, your daily rate is .00049 percent.
  • Add your balances at the end of each day in the billing cycle. Then divide it by the number of days in the billing cycle to get the average daily balance.
  • Lastly, multiply your daily rate by your average daily balance using the number of days in the billing cycle. Meanwhile, you multiply your daily rate with the compound interest with most lenders.

In general, if you pay the full balance at the fixed time every month, it will not be deducted from your account. You can also enjoy a grace period that begins at the end of the billing period and generally lasts for 21 days. However, you can renew your balance during this period without paying any interest charges.

How is APR Calculated?

As explained earlier, you can calculate APR by multiplying the regular interest rate by the number of periods in a year. This number of periods in a year includes the number in which the regular interest rate applies. Perhaps, this ratio does not indicate the number of times the rate has been applied to the balance.

Always remember, the normal interest rate expresses the actual interest rate annually in the United States. But, outside the United States, the definition of APR may be completely different.

Moreover, when defining the term, the European Union (EU) focused on consumer rights and financial transparency. Although a single formula for calculating interest rates has been established for all EU member states. Better still, there is room for individual countries to determine the exact circumstances.

Conclusion

Before applying for a card that offers an introductory discount for purchasing APR. Read the terms and conditions of the card to find out how long the introductory period will last. Please understand that the key to an introductory APR proposal is to pay the balance before the end of the implementation period. Understand the APR definition first to know how it works.

Chiemerie Ozurumba (Adorablepen) is a freelance writer, with a Degree in Computer Science & Programming. He is also a personal finance expert, blogger, public speaker, and poet. He has written so many amazing & creative scripts, articles, quotes, long & short stories, and poems to his credit. He is also a relationship, love & life coach.

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