The average American holds tens of thousands in debt, which is multiplied by a lack of understanding of APR.
At its core, APR represents all of the interest and other fees associated with taking out a particular personal loan. It’s more helpful to look at APR than the interest rate because it’s a more thorough indication of how much your loan is going to cost you in the long run.
In this post, we’re going to explain why APR financing is so helpful by telling you the 3 most important things you should know about it. Keep reading and you’ll be fully equipped to choose between the best personal loan companies.
1. APR and Loans
When it comes to personal loans and mortgages, you’re usually looking at a single APR as a percentage of your principal. This makes it much easier to compare different lenders to get the best loan terms for your situation.
If you were looking at taking out a $250,000 mortgage on a 30-year term, your interest rate might be 4.5%. When you add up all of the closing costs, which could be around $5,000, your interest rate doesn’t change, but the APR goes up to 4.67%.
On a loan with no origination fees—the closing costs from the above example—the APR will be the same as the interest rate. However, lenders often do add these fees, so APR is a better indication of the interest you’re actually paying. Over the course of long-term loans, higher APR adds up to a significant sum.
2. APR and Credit Cards
Unlike personal loans, credit cards can carry different APRs for different types of transactions. APRs for credit cards can be extremely high, which is why it’s so important to pay your monthly minimums.
A credit card may entice you with a 0% APR for the first year or two. After that initial period, the APR could jump to 15-20%, making it near-impossible to pay off your debts.
When looking at credit cards, it’s important to read about annual percentage rate. Don’t necessarily be enticed by the “deals” that they’re advertising. Look beyond to find out how your finances will really be affected.
3. How Your Credit Affects APR
Sometimes APR will be expressed in a range, as mentioned above in the credit card example. When this happens, your financial history is what will determine your APR.
The stronger your credit history, the lower your APR will be, and vice versa. Of course, each lender/credit card company will do things a little bit differently, so you should always shop around to find the best APR.
APR Financing Makes a Big Difference
Now that you know a bit more about APR financing and how it’s going to affect your long-term lending prospects, you can better shop for personal loans and credit cards. These numbers may seem arbitrary when you’re starting out, but when you take the long view is when you’ll see how much you’re actually paying.
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