Annual Percentage Rate - APR
Anyone with a credit card will know APR well. The figure represents the annual interest rate on a loan, like those on credit card debt.
It is important to note that the figure is annualized, meaning it is figured for an entire year, whether or not the loan lasts for a full 12 months. For a credit card, for instance, you might only carry a balance for a couple months, but when figuring the APR for that period of time, the rate is computed assuming you carried the loan for a full year.
This also comes up with other high-rate items, such as payday loans. For instance, if you borrow $100 from a payday loan outfit (or from Vinnie the Snake down at the OTB) and pay back $110 a month later, the APR for that loan is 120%. For reference, a typical credit card might be in the 20%-25% range.
For that payday/Vinnie the Snake loan, if you had continued to roll over the loan month after month for an entire year, paying $10 a month each month for the privilege, you eventually would have paid back $220 on the $100 loan...or ended up paying $120 to borrow the $100. Thus the 120% APR.
Why is the APR even required? Well, back in the day, there were so many idiots who didn't read the contract, and were charged like $500 a year plus whatever their card was...so that, eventually, the Consumer Protection Agency required the APR designation.
Or said another way, Annual Percentage Rate is just a fancy schmancy number that lets you know how much a lender’s going to charge you to borrow their money. Try repeating it thirty times and keep in mind that humans are a lazy (gasp!) breed, and you’ll understand why some brilliant bloke quickly abbreviated it to APR.
You’ll see APR written as a percentage (like 24%), but hold your horses and don’t confuse it with interest. Because APR is made up of interest rate plus other fees and charges that you a lender tacks on when you borrow from them. (No such thing as a free lunch, friends.)
APRs are Mr. Bossy Pants. Because they basically dictate how much you’ll be charged over the span of a year that you still owe the lender money. Basically, the lender’s giving you a loan but making you pay for it in the form of APR. And, yes, this loan, you’ve gotta pay back, no choice (not like when you borrow money from your BFF and pretend you’ve got selective amnesia when they pester you about it later). But don’t let the word “loan” fool you. Because that term is used loosey-goosey to include many things you probably won’t even think of as a “loan.”
For instance, APRs can sneak up on you (those little weasels, them) in places like credit cards, when you don’t pay your balance in full (and…um…yeah, when you don’t pay your credit card company in full for the stuff you buy, you’re borrowing money, my friend...and borrowing ain’t cheap!). It can also be present in other loan types like personal loans.
But why use APR? Glad you asked. With so many different lenders tacking on different kinds of charges and fees, APRs are a quick easy way to see which lender is offering a better overall rate. So, if Joe Black is offering you a loan for 15% APR but his buddy Ol’ Tommy’s giving you one at 12%, you can quickly see who’s giving you a better deal. Annualizing the rate gives a way to compare different loan options, since each one is reported in the same terms. In the Vinnie the Snake example, $10 might not seem like much, but 120% APR is obviously worse than a credit card (or either Joe Black or Ol' Tommy).
Related or Semi-related Video
Finance: What are Credit Scores and Wort...21 Views
Finance allah shmoop What are credit scores and credit worthiness
Remember that scene from wayne's world Alice cooper lets him
backstage They bow and chant Where'd i worthy We're not
worthy Well basically just swap one of the greatest rock
and roll singers with your local banker Yeah well as
much as you'd rather hang out with alice cooper this
nerdy guy here is wet A more important to your
credit That long hair thing worked when he was in
his twenties And not so much now I guess Anyway
if you have a bank account or a credit card
or are generally tapped into the banking and credit system
of the world in any way shape or form you
have a credit score You might not know it But
you do Where does that score come from And yeah
It's known as yours Fico score While fico stands for
fair isaac corporation that's a publicly traded company and that's
what they do they provide credit scores and they try
to be fair like isaac Anyway those scores were requested
and released through one of the big three credit bureaus
Equifax experian in trans union Oh my These guys give
you a number That kind of thing finds your reliability
in making payments to banks or other lending institutions who
might loan you dough Well why would you care home
Because that number you get directly affect the price you
pay to rent money The worst Your credit score the
higher your rent have will likely be in who likes
to pay high rent especially when it comes to renting
money Well the worst fico score is a zero and
were wondering what you'd need to have done Teo get
that like three bankruptcies in a bank robbery Maybe Well
we want to meet the third guy who loaned you
money at that point Anyway the bill gates perfect score
is an eight Fifty on such a show off And
here are roughly the breakdowns for how banks think of
credit Score c it's all color coded here with the
red yellow and green Well the goal here in having
a score is to determine your reliability in paying back
a given loan Yes the amount you're borrowing also matters
But to speed up the initial evaluation of you is
a borrower Wealthy credit score is applied to you and
it lets banks quickly come to a yes or no
or ah maybe decision Yeah quickly that credit score thing
helps and if the answers and no well then you
can always backpack across the country and stay in youth
hostels So yeah you don't want to be murdered by
a deranged dutch businessman and we suggest you stay current
on your us visa payments and have a high credit 00:02:30.173 --> [endTime] score Be creditworthy because you are worthy Hope yellow
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