What is the Annual Percentage Rate (APR)?
The APR, or Annual Percentage Rate, refers to the yearly interest rate a person or organisation must pay for the privilege of borrowing money.
This rate is applied to various financial products, such as credit cards, car loans, and mortgages.
In other words, the APR tells you the total expense of borrowing money as a percentage of the loan’s original principal amount. The purpose of the APR on a loan or credit card is to provide an exact idea of the borrowing cost.
Hence, the APR is among the most important figures to consider when applying for new credit.
What factors influence the Annual Percentage Rate (APR)?
The lender or creditor determines your APR, but it can also be affected by your credit scores.
For example, if you have a history of good credit behaviour and are viewed as a low-risk borrower by potential lenders and creditors, you may be offered a reduced interest rate, which typically leads to a lower APR.
What is the difference between the Annual Percentage Rate (APR) and the interest rate?
APR and interest rate are similar in meaning, but they are not identical.
Interest rates only cover the cost of borrowing money and do not include any other expenses associated with the loan. It is expressed as a percentage and can be paid annually, monthly, or daily.
In contrast, the APR is the total interest rate charged for an entire year and includes additional costs associated with the loan. For example, a mortgage APR would typically reflect the interest rate and any closing costs, origination fees, broker fees, and other expenses related to obtaining a loan.
When comparing different loans, the APR gives borrowers a more comprehensive idea of the total costs involved. Due to this, the APR is generally higher than the interest rate, but this may vary from case to case.
