What is an APR? Understanding the Annual Percentage Rate on Your Loans

Photo cred to Access Wealth

If you've ever taken out a loan, you may have come across the term APR, or annual percentage rate. But what exactly is an APR, and why is it important?

An APR is the cost of borrowing money expressed as a percentage of the loan amount. It includes the interest rate on the loan, as well as any fees or other charges associated with the loan. The APR is designed to give borrowers a more comprehensive understanding of the true cost of a loan, as it takes into account not only the interest rate but also any additional fees that may be charged.

APRs can vary significantly depending on the type of loan, the lender, and the borrower's creditworthiness. For example, a credit card with a high APR will be more expensive to borrow from than a credit card with a low APR. Similarly, a personal loan with a high APR will be more expensive than a mortgage with a low APR.

It's important to understand the APR on any loan you take out, as it will affect how much you pay in total over the life of the loan. When comparing loan offers, be sure to compare the APRs to get a true sense of the cost of each loan.

In addition to the APR, you may also come across other terms such as the annual percentage yield (APY) and the annual percentage rate of charge (APROC). These terms are similar to the APR but apply to different types of financial products. The APY is used to express the interest earned on a savings account or other type of investment, while the APROC is used to express the cost of a credit card or other type of credit.

In summary, the APR is an important factor to consider when taking out a loan. It helps you understand the true cost of borrowing money and can help you make an informed decision when comparing loan offers. By understanding the APR, you can make financial decisions that are right for you and your budget.