Annual Percentage Rate (APR) | Definition

When applying for a credit card, mortgage, or any other type of loan, many financial institutions disclose the APR of the money given by the bank. To account for inflation and to make a profit, financial institutions charge interest rates on the money, 

The interest rate charged is referred to as APR. There will come a time when different types of loans are needed, such as auto loans to purchase a car or a mortgage to buy a house; knowing how the different types work is key to financial success in the long run.  

The Definition of APR

The Annual Percentage Rate (APR) is the interest rate used when borrowing money from financial institutions over a period of time. Per the name, the APR is the cost of borrowing at a yearly rate. Many different types of loans are available, all of which have varying nominal interest rates and payment times, making it difficult to compare them. 

Consequently, the use of APR became useful for users, as they could understand the interest charged on the monthly payments made depending on their loan amount and were able to receive lower rates. 

Different types of APR

Purchase APR

This rate is utilized when a credit card is used for daily transactions. At the end of the month, when the consumer has to pay back the card's outstanding balance, this rate is used to calculate the interest payments if they fail to pay off the full balance. 

Fixed APR

A fixed APR does not change over time. Therefore, when receiving a loan for a long-term purchase, such as a house, fixed APR is more advantageous than variable as the lack of change in monthly payments makes it easier to budget for the future and become financially stable. 

Variable APR

A variable APR is tied to the lending rate, also known as the prime rate. If the prime interest rate were to rise, the variable rate would also increase and vice versa. As interest rates vary over time due to the constant changes in the economy and worldwide operations, they cause a shift in the APR calculations. Consequently, the changes in the rate make monthly payments fluctuate. 

This type of APR is more beneficial for short-term loans, such as credit cards or small loans, as the change in prime rate could potentially lower the rate, meaning the value of the monthly payments would be less. 

Cash Advance APR

A cash advance is when the credit card company allows you to withdraw cash from the card. Although this option is available, note that it should be a last resort, as transactions related to a cash advance begin accruing interest immediately. Therefore, it will not be only the principal amount when paying it back at the end of the month. 

Penalty APR

Before a company gives you a credit card, you must accept the terms and conditions of their contract. However, after receiving the credit card, if an event were to occur that resulted in the contract's conditions being violated, the credit card company will implement a penalty APR higher than your current one. 

An event that may cause a breach of contract with the credit card company is failure to pay off your outstanding balance within the given time frame. Consequently, it is crucial that you do not spend more than you make, as it will set off a chain reaction and negatively impact your financial situation. 

How to Lower APR

Typically, APR cannot be lowered by the loan applicant, and the rate offered is usually final. However, for credit card APRs, there are certain steps a person can take to lower their interest rate.

Leverage Your Position, If Possible

If you have a good credit score and have little to no outstanding debt, you can try and negotiate for a lower APR. Sometimes, when applying for a new credit card, companies lead the consumer to believe that the APR for their credit card is the final offer, and there is no chance of it being lowered. 

However, you can go to a competing company and try to receive a lower APR. Once you receive a lower rate, you can go back to the original company in hopes of getting a lower percentage than the one offered by their competitor. 

If the bank wishes to keep a customer with a good credit score, they may offer a better rate; if not, you can go back to their competitor who already gave you a better deal. 

At some point in your life, there will come a time when financial assistance is needed, resulting in you reaching out to a financial institution for a loan. Although there is little to no chance you can receive a lower rate on the loan, the key thing to remember is always to make the payments in full and on time to ensure your credit score does not get negatively affected.