You’ll see APR used in conjunction with several different financial products, including credit cards, loans, and hire-purchase agreements. But what does it actually mean and how does it work? In this guide, we tell you everything you need to know.
What is APR?
APR stands for Annual Percentage Rate, and it’s the official interest rate used to borrow on a credit-based product. It takes into account the overall interest rate you will pay as well as any additional fees or commissions. In other words, it is a standardized way of showing the cost of borrowing over a year.
The APR will be expressed as a percentage of the amount you have borrowed and is calculated using a formula described in the Consumer Credit Act (1974). Each lender must comply, making it a useful way to compare products such as loans and credit cards on a like-for-like basis.
It is important to note, however, that the APR will only take into account mandatory charges, which means avoidable charges such as those related to late payments or going over your credit limit will not be included.
What is the difference between interest rate and APR?
The interest rate is simply the amount charged on the amount you borrow. It is expressed as a percentage and is usually (but not always) quoted annually. An APR, on the other hand, includes the interest rate, plus all other fees, making it a more accurate representation of the total cost of the product.
What is a representative APR?
When a loan or credit card is advertised with a representative APR, the rate must be offered to at least 51% of successful applicants for the product. However, this means that the remaining 49% may not qualify for the advertised rate and are likely to pay more.
What is a personal APR?
A personal APR is the rate you are actually granted, and it will be based on your personal circumstances as well as the amount you want to borrow.
What affects your APR?
The APR offered to you by a lender will depend on your credit score and how much you have borrowed from in the past. If you have always paid off your debts on time and have not exceeded your credit limit, you will be offered a more competitive APR than someone who has regularly missed payments and is therefore considered a greater risk .
Lenders will also look at your annual salary and household expenses before deciding what APR to offer. The amount you wish to borrow and the duration for which you wish to borrow will also be taken into account.
For personal loans, you will generally find that the longer you want to borrow and the longer the term, the lower the APR will be. However, you should always ensure that you only borrow what you can afford to repay.
What is a good APR?
The lower the APR, the less interest and other fees you will pay. Many credit cards offer a 0% APR on purchases and balance transfers for a set number of months. However, it is important to check what the APR will amount to after this point, as this is the rate you will pay if you do not pay off your balance in full within the 0% period.
Competitive personal loan rates are around 9.5% to 10.75% APR depending on how much you want to borrow. However, the APR for credit cards in India is quite high, in the range of 43% to 53%.
It’s always best to shop around and carefully compare your options before applying for a credit card or personal loan. Many lenders offer eligibility checkers that will give you an indication of how likely you are to be accepted for a particular credit card or loan.
Eligibility checkers do a “soft” search of your credit report, so it won’t leave a mark on your credit report for other lenders to see. If there are a lot of “difficult” searches on your credit report in a short time, lenders may see this as a sign that you are having trouble getting credit.
What is the difference between a fixed APR and a variable APR?
A fixed APR won’t change, so you’ll know exactly how much you need to repay.
A variable APR, on the other hand, can change at any time and will often follow the base rate of the Reserve Bank of India. This means that if the base rate increases, your APR will also increase, but if the base rate decreases, your APR may also follow. Credit cards tend to have varying APRs.
How is the APR calculated?
The APR is calculated by looking at a range of factors, including the amount loaned, the loan repayment schedule, and any additional or late payment fees that must also be added to the loan repayment.
What is the difference between APR and interest rate?
Essentially, the interest rate is the additional amount a financial institution charges a customer to borrow money. APR is a different number. Not only does it include the interest incurred on a loan, but it also takes into account all other fees included in the loan agreement. These could include setup fees, ongoing service fees and prepayment fees. Divide the APR by 12 to figure out the true monthly rate.
0% APR and credit cards
0% credit cards include promotional offers that give the cardholder a grace period of, say, six months during which no interest is incurred when the card is used for purchases. The card, however, will still have an APR which is calculated using the interest rate the card reverts to at the end of the 0% term.
What is APY?
APY is short for Annual Percentage Yield. It generally applies to money you put in a product such as a savings account and tells you how much interest could be earned in a year. APR and APY both measure interest. But the first is the interest charged, while the APY looks at the interest earned.