APR (Annual Percentage Rate) is a simple financial concept to grasp, however, calculating your APR is a much more difficult task. APR is the interest rate you are signed up to pay when dealing with credit and loans. Taking that interest rate you receive and dividing it by 365 (the number of days in a year) will give you a basic, yet not exact, amount that you will actually have to pay back in interest on any loan you take out.
For instance, if you take out a loan for $1,000 dollars at 10% APR and have to pay it back in one year with one payment, you are left with the equation of: ($1000 x 10% x 365 days (billing cycle of one year))/365 days) = $100 in interest. Add $1000 dollars to that and you will know the total loan cost will be $1100 dollars.
Of course this could never be accurate, especially if you are dealing with credit. Your credit account is constantly changing as you rack up purchases. If you pay off all debts before the end of a billing period, you don’t pay interest; however, if you can’t pay back the balance in full you can be stiffed with harsh APR interest. Following billing periods can increase the amount you own in interest if previous interest debts aren’t removed from the
APR rates are made difficult to calculate as different lenders process loan and credit applications differently. Some lenders process the applications manually using information an applicant has provided in order to determine an APR. In most instances, seeing as how we live in a world dependent on technology, it is determined by computer software. Different APR processing software programs can use the same information, but provide two different APR rates pending what is actually integrated into the loan interest.
What fees make up parts of the APR?
It is not always known what makes up the whole of APR, but it is safe to say that in some loan APR rates, the following fees are compromised within the Annual Percentage Rate itself. Discount points and origination points are common factors. Interest paid from the loan closing date until the end of the month, generally assumed to be an average of 15 days of interest to be paid, will be included. This number is known to be inconsistent, ranging from 1 – 30 days depending on what loan provider you use. Loan processing, underwriting, and preparation fees are there, as well as private mortgage insurance in the case that you are preparing a mortgage loan. Loan application and credit life insurance are two factors that may come into play, but perhaps not with every lender.
What is not (normally) included in the Annual Percentage Rate?
There are several fees that will not usually be calculated into fixing your APR rate. These are just some of the fees that shouldn’t make up your interest rate. If they do, you may want to examine other lenders that can provide you with a better rate on relevant data. Titles, abstract, escrow, notary, home-inspection, recording, and an appraisal fee should all be left separate from your APR calculations. Credit reports and transfer taxes should be detached from your APR, as well.
Be cautious of hidden APR rates and fees
When shopping around for credit and loan lenders, be aware that APR should be a deciding factor in choosing the lender. However, many loan and credit lenders try to trick new homeowners and those lacking in fiscal knowledge by making them deals to good to be true.
In every loan and credit document you examine, do not skip the fine print. The fine print may entail the true APR rate you will receive after the “low-introductory” interest rate. Be sure to know what will happen to your APR in case you can’t prepare a payment on time. Commonly, this is known to make your APR suffer with incredibly high rates, and that doesn’t even include the fees you will have to pay for missing a payment. Credit cards may allow cash advances, but these cash advances charge much higher interest than that of basic charges on your credit account. This is also apparent for checks from credit lenders, as well.
What should you ask a credit lender about APR before you sign for a new credit account (loan, credit card, etc.)?
Doing research on what will make the best loan account for you is an excellent way to gain wisdom and financial responsibility; asking a loan lender personally is a second step you can take in order to gain a better look at which loan might be better for you.
Ask the loan lender whether the loan interest (APR) rate it fixed or can vary. This could greatly affect how your payments will look month by month.
Another choice inquiry to make is to ask what charges aren’t inclusive with the APR. What are those charges, are they truly necessary, and how and when would you have to pay them?
An all important question that you need to ask yourself, as well as your lender, is can you afford this loan or line of credit? A loan with a high APR rate can be extended out over longer periods of time if you don’t feel you can make larger payments on shorter loan billing periods. While this is excellent for those that may not be able to pay higher charges, in the long run this will cost you more money. This is because you will be charged interest over a longer period of time and on higher amounts, too.
How to pick the best loan based on APR
The number one way to find the best loan for yourself is to get down and dirty with research into what makes any loan tick, and what affects your APR. The Internet is a bountiful mountain of information on APR, interest, loans, and credit. Find loans that suit your preferences, and then ask for expert advice by comparing loans with similar payment terms. Asking for the honest opinion of a loan lender on which loan will keep your losses at the lowest amount possible is essential to getting the absolute best loan rate with any APR that you can get.