Before you take out a credit card or loan, it’s a good idea to look at the annual percentage rate (APR). The APR includes fees in addition to interest. It can tell you the actual or total cost of borrowing money each year.
Your APR shows the total cost of your personal loan or credit card each year.
As you shop around for loans and credit cards, be sure to compare APRs. By doing so, you’ll understand how much you’ll potentially owe in interest and fees over the course of a year. This can help you avoid financial surprises and choose the most affordable option for your unique needs.
With credit cards, your interest rate and APR are the same, but it’s different for a personal loan.
While your interest rate may be charged monthly, annually, or daily, your APR is always representative of the full year. Because it includes interest as well as fees, like origination and processing fees, your APR will usually be higher than your interest rate.
There are several types, including:
If you’re unsure of your APR, check your credit card or loan agreement. You can also contact the lender or credit card company directly. Be sure to ask for the APR instead of the interest rate. Your monthly statements may also have this information.
To calculate your APR, follow these steps.
- Add up the fees and total interest you’ll pay over the life of the loan.
- Divide that sum by the loan principal.
- Divide that sum by the total days in the loan term.
- Multiply the result by 365.
- Multiply that by 100 to get APR in percentage form.
Let’s say you’d like to take out a $5,000 loan with a two-year term, 5% interest rate, and $250 origination fee. In this case, your APR would be 9.83%. The more fees and additional costs you have, the higher APR you can expect.
There are a number of factors that affect the APR on a loan or credit card. Economic factors may include the strength of the economy, inflation rates, consumer spending, employment, stock and bond markets, and Federal Reserve policies. Personal economic factors are usually your credit score and debt-to-income ratio.
A higher credit score can lead to a lower interest rate and APR. On the flip side, a lower credit score may result in a higher APR and increase your overall cost of borrowing. While you can’t control the economic factors that can play a role in your APR, you can control your credit score and other personal economic factors.
Here are some tips to help you save money on credit card interest:
A good credit card APR is a percentage that’s at or below the national average. The national average is 20.68% as of May 2023.
The APR will not have an impact on your monthly payments. Instead, it’ll show you the overall cost of borrowing money each year. For a quick view of potential monthly payments, look at the interest rate.
A variable APR can change over time. It might start out low and eventually increase in response to market changes. A fixed APR, however, is set in stone and won’t change over the life of your loan or credit card.
If you move your balance from one credit card to another credit card, you may be charged a balance transfer APR. This rate varies by credit card company.
To increase your chances of a lower APR, improve your credit score or contact your credit card issuer and ask them to reduce your current APR. You can also shop around and try to find lower APRs that you may qualify for.