What is APR? Unless you’re well-versed on personal finance, many of the terms lenders use, such as Annual Percentage Rate (APR), might be unfamiliar to you. But if you plan to secure a loan now or in the future, it’s important to arm yourself with knowledge so that you can make the best financial decisions for yourself and your family. 

APR is one of the most common terms you’ll encounter when speaking to lenders, and it’s also a concept that can have a great influence on your monthly loan payment. So, what does APR mean – and what does it mean for your budget?

As previously stated, APR stands for Annual Percentage Rate, or the amount you pay annually to borrow money. You’ve probably encountered APR if you’ve ever applied for a car loan, mortgage, or credit card – or tuned your TV to any car commercial. 

APR is a recurring, yearly amount that includes fees associated with borrowing money such as interest, closing costs, and insurance. If you’re wondering what the difference is between APR vs interest rate – the answer is simple: APR includes interest, but it can also include other costs. 

In other words, APR lets you know how much you can expect to pay – or earn if you’re an investor – on a particular sum of money. It delineates what percentage of your total annual loan payments go towards paying off the money you owe, and what percentage is paid to the lender as profit, loan insurance, or for other rendered services. This is why information on a specific loan’s APR is so vital – it allows you to shop around and compare rates between different lenders.  You can use a handy APR calculator to estimate this – but more on that later.

If you don’t see APR listed alongside the terms of the loan, ask. Lenders are required by law to provide borrowers with an APR, and this knowledge can help protect you from predatory lenders as well as ensure you can secure the best deal on your loan. 

A good rule of thumb is: The lower the APR, the better. A lower APR means you’ll pay less interest over the life of the loan. It’s also important to note that APR does not include compounding interest.

But there’s more to it than that. If you start looking around, you may notice that lenders distinguish between fixed and variable types of APR. So what are the different types of APR, and what do they mean?

If you find yourself asking “What is fixed APR? What is variable APR? How are they different?” you’re in good company – it’s a question many people ask as they approach applying for their first loan. The good news is that you’ve likely already encountered examples of fixed and variable APR without even realizing it. 

Variable APR is a type of APR where the interest rate rises and falls with the national market. You’re most likely to encounter it when applying for and paying off a credit card. Put simply, variable APR means that the rate is subject to change, and the rate you sign up for may not be the rate you end up paying down the road. In many cases, this can work in a borrower’s favor – as markets often cycle through “low” periods with less interest. However, the inverse can also be true – so if you’re looking at a variable APR, be sure to stay abreast of current trends. 

Many borrowers apply for a mortgage with a fixed APR, meaning the interest rate does not change over the life of the loan. However, there are a few exceptions. Even with a fixed APR, your rate can potentially increase if you miss payments. If you have a mortgage, you can also change your rate by refinancing – or trading in your current APR for a better deal, if the current market rate is lower than when you first signed. 

Now that you understand what APR is, you can focus on finding the best fit for your budget. One of the best ways to ensure you’re able to secure a low APR on a loan is to have a good credit score. 

Credit scores help lenders know that you, and your loan, are a solid investment for their business. This means they need to know you can make reliable, on-time payments – which are a few of the factors that go into tabulating your credit score. 

If you want to put your best foot forward with a lender, focus on improving your credit score, even if it’s already stellar. A simple way to do this is to ensure that you’re making on-time payments on any debt you have, that you never spend more than 30% of your credit card limit, and that you only apply for credit – loans, credit cards, or otherwise – once or twice a year. 

Looking for an APR calculator? Check out one of our handy loan calculators to figure out the right APR for your budget. 

With these tools in hand, you’ll soon have what you need to secure a loan with a great APR. Do you have more questions about APR, the loan application process, or which loans might be right for you? Give us a call at 1.800.205.3464 or visit one of our banking centers.