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What Is APR And How Does It Affect Loans?

Bryan Hunt Money

In normal life, we usually read this APR which stands for “Annual Percentage Rate”, especially for people having credit cards. But very few of them know about APR. Normally, when we avail of any type of loan like a home loan etc. we have to pay interest against it similarly in the case of credit cards if a cardholder does not pay off its bill within the mentioned period, the APR will be charged.

What Is An APR?

An APR is a rate at which a person has to pay off their unsecured loans like a 300 pound loan or credit card. Moreover, we can say it’s a cost of borrowing some amount. It gives a clear overview of the monthly debts throughout the year related to the loan or credit cards. The lenders always have to disclose this rate to their clients beforehand as APR is a crucial rate through which a person decides the overall cost of that debt.

Calculation Of APR

APR is calculated after considering many aspects of the loan. Which includes the amount of the loan, the schedule of your loan and any other late or finance charges that may also apply.

The total rate of APR is divided into 12 months and then applied on monthly basis.

So, if a credit card holder is not able to pay its bill amount on time in case of a credit card, then the annual percentage rate will be applicable.

For example, a person took 300 pound loan, and APR is 12% and the period is one year. In this case, the person has to pay interest every month in the form of EMI. So the monthly instalment will be 27 pounds exclusive of the finance or any other charges.

Effects On Loan

In the above example of 300 pound loan, the total amount which was payable for the whole year is 320 pounds. 20 pounds is the interest paid on 300 pounds.

Types Of APR

There are mainly two types of APR – fixed APR and variable APR

FIXED APR

Fixed APR is the rate which is fixed throughout the loan period. Usually, this type of rate is applicable on car loans and mortgages.

VARIABLE APR

Variable APR is a rate which usually fluctuates according to the different types of situations prevailing. It can change anytime without any prior information.

Some Important Points About APR

  • APR As A Point Of Comparison: though it is said that based on APR the actual cost of debt is determined. But it is not always true as they are fluctuating. So, in this case, we can say that it is not the only thing to consider while taking a loan or any credit card.
  • Internal Charges: most of the time the issuing company does not disclose the actual cost which is about to incur, so one should go through all the charges applicable and then select a particular option.