Annual Percentage Rate
Mortgage Dictionary -> Annual Percentage Rate
Take a look at your latest credit card or other loan statement, and you're sure to see three letters that stand out: APR. But the question is, what exactly is the annual percentage rate, how is it determined, and why is it such an important number? This is the question that many people ask on a daily basis, so if you're wondering about it, it's time to find out the answers to these questions.
What is the Annual Percentage Rate?
In the most basic terms, the annual percentage rate (APR) is the interest rate on the principal of a loan. It is the rate of the balance that the borrower will pay in interest to the lender, and is by far the lender's main source of revenue. So, for instance, on a credit card with a balance of $10,000 and an APR of 10%, the borrower will pay roughly $1000 in interest over the course of 12 months, assuming that minimum payments are made.
How is the Annual Percentage Rate Determined?
Simply put, different companies determine the APR differently. For the most part, department stores such as Sears, JC Penney and Target, among others, have APRs of greater than 20%--which is considered a very high APR. Other companies, like Capital One and Chase, offer cards with interest rates as low as 5%.
Types of Annual Percentage Rate
There are two main types of annual percentage rates: fixed and variable. With fixed annual percentage rates, the APR remains the same no matter what financial changes the economy undergoes. So if you have a card with a 7% fixed APR, it will stay that way for as long as you use the account. Variable APRs, on the other hand, change on a yearly basis. A card with a variable APR of 5% may rise to 9% the next year, depending on the formula the company uses to determine APR.
Why is APR Important?
APR is an important thing to pay attention to because it can greatly influence how you use your cards, and determines how much extra you'll be paying on every purchase. That's why anyone considering a credit card is wise to take a good look at the APR before applying.