Introduction
APR stands for "Annual Percentage Rate." It is a standardised way to represent the cost of borrowing, including interest and fees, over a one-year period. APR is used primarily for consumer loans, credit cards, mortgages, and other financial products where interest is charged on a yearly basis.
APR takes into account not only the interest rate on the loan or credit card but also any additional fees or costs associated with borrowing. These costs may include origination fees, points, closing costs, and other charges. By factoring in these expenses, APR provides a more comprehensive picture of the true cost of borrowing than the interest rate alone.
Example
For example, let's consider a credit card with a 20% interest rate and an annual fee of $50. The APR for this credit card would be higher than 20% because it includes the interest charged on the outstanding balance and the $50 annual fee.
It's important to note that APR is an annualised figure, meaning it represents the cost of borrowing over one year. For loans or credit cards with terms less than one year, the APR is adjusted proportionally to reflect the equivalent annual cost.
In Summary
APR is a valuable tool for consumers comparing different loan or credit card offers as it allows them to easily compare the true cost of borrowing across different products. When considering financial products, it's essential to look at both the APR and any other terms and conditions associated with the loan or credit card to make an informed decision.
