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If you’ve applied for a credit card or loan you’ve probably asked yourself what is Annual Percentage Rate (APR)?
It’s pretty simple. APR is the yearly cost of borrowing money from the lender.
When you take out a loan or use your credit card, you are borrowing money. When you pay that money back, you have to pay the amount you borrowed plus the APR.
Finding a good APR is essential to smart borrowing.
This article will walk you through the basics of APR.
Interest Rate vs. APR
APR and interest rates are similar, but there are some important differences.
Interest rate is the simple cost of borrowing. APR includes the interest rate, but could also include other fees, too.
With credit cards, APR and interest rate are the same. A credit card’s APR only includes the interest.
With a loan, APR could also include other costs like service fees.
When taking out a mortgage, lenders are required to tell you both the APR and the interest rate. That way you know what the lender charges besides the interest alone.
Fixed APR vs. variable APR
There are two main types of APR: fixed or variable.
Before taking on debt, make sure you know which kind of APR you’re signing up for.
Fixed means APR will not change during the loan term. You’ll be paying the same interest rate until you pay off the loan.
Variable APR can change over time, so they’re tougher to budget for.
Credit Card APR
When it comes to credit cards, APR is simple—credit card APR is the exact same as the card’s interest rate.
Things can get a little confusing.
Credit cards come with a few different types of APR. A credit card may have one interest rate for transferring balances and a different interest rate for cash advances.
Know which credit card APR you get for each type of transaction so you can budget accordingly.
Aside from interest, loan APRs also include fees. A loan’s APR is not the same as the loan’s interest rate.
The fees included in an APR will vary by the type of loan.
When shopping for a new loan, most people compare loans from a few different lenders.
Knowing the loan’s true interest rate will help you decide which loan is the best deal for you.
What’s a good APR?
A good APR depends on the type of debt.
Auto loans, credit cards, mortgages and personal loans all have their own average APRs.
Here are the average APRs for each type of loan:
- Auto loan (48-month): 5.29%
- Auto loan (60-month): 5.15%
- Credit card (all accounts): 15.9%
- Mortgage (30-year fixed): 3.13% (as of 6/30/2020)
- Personal loan (24-month): 9.63%
If you’re ready to take on a new loan or credit card, make sure to read through all of the details on the APR that comes with it.
Having a firm understanding of the APR will help you figure out what’s right for you.
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