What Is APR? A Simple Explanation

In every loan agreement, there is something called APR, but what is APR? It stands for annual percentage rate, and it is an indicator on how much interest you will pay on your outstanding loan balance. As a general rule of thumb, the lower the APR, the more favorable the loan terms will be as well as lower monthly payments.

Credit is the greatest determining factor when lenders calculate APR for borrowers. If a borrower has a history of paying their bills on time and keeping their debt low, they will attract more favorable interest rates because lenders will be more comfortable with doing business with them. However, for those with bad credit, a higher interest rate can mean thousands of dollars in interest payments over the life of the loan.

Many financial experts will suggest that before taking out a long term loan, borrowers should make sure their credit score is good enough to take advantage of low interest rates. Sometimes this means waiting some time to pay down debt before starting the loan process. A little patience can save tens of thousands of dollars in interest on long term loans.

Short term loans also have an annual percentage rate, and they generally tend to be much higher than their long term counterparts. For many payday lenders and other sources of quick and easy financing, borrowers can see interest rates commonly be in the neighborhood of 2000%. But, the other side of the APR equation is that these loans are meant to be paid off in a very short amount of time before these fees accrue. In fact, for most short term loans, the fees are very reasonable for the convenience that borrowers enjoy.

The one thing to remember in terms of the annual percentage rate is that if you take out a short term loan and don't pay it back fast, this interest can roll over and create enormous balances over time that continue to snowball. That is why it is so important to do research and investigate what loan is the better choice to pursue. Remember that interest only accrues when there is an outstanding balance, and paying off loans fast and early will eliminate this from being a problem in the first place.

Interest is how lenders make their money, and many exploit those with bad credit who need cash in a hurry. Taking the time to find the right lender for a particular loan can eliminate a lot of problems down the road. Additionally, looking at the APR will be a good indicator with how much interest must be paid over the life of the loan.

Knowing what is APR can help ensure that you make the right decision with regards to your loan. Get a short term loan with a high APR is good for balance that will be outstanding for less than a month, but a loan with a low one is good for things like mortgages and car loans. The best approach to have is to make sure your credit is in tip top shape and to do research into the various lending options that are available.

Source by Bob McNicoll

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