Many people have heard about APR, otherwise known as the Annual Percentage Rate. It’s a standard way of understanding and comparing the costs of borrowing. Many people use it as one of the key factors when deciding whether or not to take a loan or choose a credit card.
How much do you know about APR? Do you know how it works, how it’s calculated and why it’s used? If you’re going to borrow money, understanding APR and how interest rate calculations work is important. This article explains what you should know about Annual Percentage Rate and how it applies when considering an alternative loan.
What is APR?
The Annual Percentage Rate shows the percentage rate of interest that you’ll pay over a year on money you’ve borrowed. It’s commonly used when taking out credit products like credit cards, personal loans, and car finance. It provides an easier way to compare various credit options from different providers to get the best rate using the correct APR calculation formula.
APRs vary from provider to provider, as well as between credit products. They include critical factors such as:
- The interest rate.
- The fees and charges.
- How you must pay back the loan.
- When you should make payment.
- Length of the loan agreement.
- The amount of each payment.
The lower the APR, the better the deal for you. So, if you’re thinking of taking a loan, you’ll need to shop around and consider understanding APR better.
Why is APR Important?
It simply offers you a way to compare a range of loan products side by side when borrowing, thus allowing you to choose the best and most competitive option. By being able to check different rates, you’re provided a way to determine whether or not to accept a loan offer.
The fact that APR takes into consideration all fees, costs, and payments to be made, as well as the interest rate charged over the term of the loan, means that it’s a great way to compare credit options.
Why Do APR Rates Differ?
You might ask yourself why you’re getting different APRs for different credit options and from different providers. A few things may affect the rate you’re offered, and the main ones include:
Your Credit Score: Your credit score usually has a direct impact on the APR you’re offered. The better your credit rating, the lower APR you can get. The difference between people with excellent and poor ratings can sometimes be as high as 40-50%.
Term of the Agreement: While the length of the term will not affect your APR, it will affect the total amount of interest you’ll have to pay. This is why it’s crucial to read Reading your loan agreement in order to have a solid understanding APR and the terms of your loan.
The Loan Amount: The loan amount you plan to borrow may also affect the APR you’re offered. Some lenders or providers will lower the APR when you borrow more from them.
It’s Not Just About APR
While understanding APR enables you to compare loan products, you must also consider other important factors. Payday loans are often less expensive than other short-term credit or real-life alternatives like:
Fees and interest for bounced checks or overdraft protection.
Skipped bills with interest, late charges, and reconnect fees.
Missed days of work because of, for example, needed auto repairs.
The only cost for a payday loan is the fixed, up-front fee. The fee is capped at $45 and loans are limited to $255. However, loan providers are required to state the the APR according to Regulation Z. The typical APR for a 14-Day loan is 460%, this number is accurate only if the consumer took out the loan every two weeks for the entire year. However, most customers do not.
Compare the cost of a $100 loan for 15 days:
|Average Overdraft Protection (ODP) & Non Sufficient Funds (NSF)||$28.95||704.45%|
|Median Overdraft Protection (ODP)||$27.00||657.00%|
|Credit Card Late Fee 1st Time Late||$25.00||608.33%|
|Credit Card Late Fee 2nd Time Late||$35.00||851.67%|
|Utility Late/Reconnect Fee||$46.00||1119.33%|
|California Payday Loan||$17.65||429.48%|
At Cashback Loans, we offer solutions that help you take back control of your finances. Get in contact with us today! Reach us by phone at 1 (888) 315-1079, send us a message, or find a store near you.