APR- APR is an acronym in English that stands for “Annual Percentage Rate.” However, most people call it “interest rate”. Interest rates have been on a steady rise over the past few years. As interest rates climb, so do the interest costs of your savings. That can mean less money for you in the form of interest payments, and a greater amount of interest in the form of higher costs of higher-rate debt. While interest rates do vary from one bank, state and country to another, there are some key things you should keep in mind when you are shopping for the best rate.
If you’re new to loans, your APR is the amount the institution will charge you to apply for a loan. And while the APR and interest rates technically differ a bit, you should think about the interest charge and payment afterward (more on that later).
What determines my APR?
Your Annual Percentage Rate(APR) varies based on many things – your credit score is the most important factor. The better your credit rating, the more likely your APR will be lower. This is because lenders view credit scores as a form of financial trust. With a higher credit rating, they figure you’re more likely to get your money back, which is why you get the lower rate.
Does the APR matter?
Yes. Yes it matters. See the “Payments” section.
Now, let’s talk about the deadline
In the lending world, “term” can mean a lot of things: your agreement, what you promise to deliver, things like that. But when people mention “rates and terms,” they’re usually talking about how long the loan is for. In general, the longer the term, the higher the APR. Which brings us to our next section…
Payments, not just monthly
Well, you’ve come this far. Let’s talk numbers. The most important thing to worry about: your monthly payment. But it’s not as clear cut as what you pay each month. This is where your terms and your APR come into play (I told you I’d come back to those). For example, let’s say you intend to borrow $15,000 for your new car. You have a good credit rating, so your APR is 2.5%. And, as for the term, he does not want to make payments for more than five years.
Loaning $15,000 at 2.5% APR over five years brings your payment to about $266. However, perhaps he wanted to keep it under $250. In that case, you could ask if longer terms are available, which, as you now know, often come with a higher APR. Another example, you are now looking at a six-year loan with an APR of 3.5%. That reduces your payment to an amount of $231. It puts you under your budget and, to top it off, you have gas money left over. (If you’re getting dizzy with the math, check out our auto loan calculators. They’re great.)
The real cost of that rate and the term
Are you still reading? Cool! Remember when I mentioned how much the institution would charge you to take out a loan? Excellent.
calculator and car keys on top of some money Now let’s explain those examples on the lifetime interest charge:
- Five years, 2.5% APR = about $975 in total interest
- Six years, 3.5% APR = about $1,650
So, we repeat: the longer the term + the higher the rate = the more you will pay. It’s up to you whether it’s worth having the extra cash each month or paying more over time. Just remember that you can always pay more than your standard payment, but you can never pay less. So if you opt for the cheapest payment and make extra payments, you’ll cancel early and pay less overall.
What if my credit is bad?
Take that five-year 2.5% loan and raise your APR to 6.5%, and your new payment will be about $293. Furthermore, you will pay just over $2,600 over those five years.
But remember, you’ve got a car and you’re working toward a credit score you can be proud of. It is something that pays off in the end. And, if you’d like to learn more about credit scores, check out our FICO Scores page. Don’t feel like reading on? Watch this handsome young man on YouTube (me) talk about the basics of credit and how to build and regenerate it here.
And don’t forget co-borrowers. If you have a family member or someone you trust with a strong credit rating, their good rating may offset yours and lead to more favorable terms.