APR: ALWAYS Pay Attention to This Number

How many times have you focused on the monthly payment’ amount? For example, when it is time for you to get a new car loan, you look at the monthly payment to ensure that you’ll be able to comfortably make the payment, right? I’m not saying that should not be a HUGE determining factor but the most important number you should focus on when you are financing anything is, Annual Percentage Rate (APR) What actually is the APR you may ask?

Annual Percentage Rate (APR), which is sometimes referred to as interest rate is the percentage that represents the annual cost of borrowing money. The higher the APR (interest rate), the higher the cost of you borrowing the money.

How does APR work?

When it comes to credit card, the creditors (credit card companies) usually offer you a grace period for new purchases, so if you pay your balance by the due date, you pay just the amount you owe WITH NO INTEREST. However, if you carry a balance, then you will pay what you owe PLUS the interest rate that you agreed upon.

Let’s put this in perspective and understand how it is calculated:

Let’s say your card’s APR is 18 percent, and your average daily balance during a 24-day billing (statement) cycle is $1,000.

First, we will find the daily rate:

18% (your APR) divided by 365 (days) = 0.0493% (Your daily rate)

Then we will find your monthly interest charge:

0.0493% (Your daily rate) multiply by 24 (billing days) multiply by $1,000 (Your balance) = $11.832 (Monthly Interest charge)

Let’s put Payday Loans in perspective:

Someone borrows $500 from a payday loan company and gets charged a fee of $105 for the loan. They are to pay it back in 15 days, so in total they’ll have to pay $605. It does not seem a lot, but in reality, their APR is 511%. Hence, they charge a “fee” and not tell you the actual interest rate. (They put it in the fine prints instead since it's required by law)

As I mentioned earlier, you should ensure you are able to make the monthly payments, but you should also pay close attention to your APR, so you do not pay more money than necessary.

To me, APR is more important than the monthly payment. Here’s another example:

If you were to borrow $5,000 at 7% APR for 5 years, your monthly payment would be $99. Sounds great right? You’d pay $940 in interest. However, if you were to borrow $5,000 at 5% APR for 3 years, your monthly payment would be $150. Yes, it is higher, but you would only pay $395 in interest.

Yes, taking on monthly payments that you cannot afford will lead to bigger problems such as missed payments, penalty fees, charged offs, etc., which will be damaging to your credit. Are lenders required to disclose APR?

Yes, the Truth in Lending Act is a federal law that requires lenders to disclose the APR whenever they are lending you money. Always look for the APR in the disclosures so you know exactly how much it is costing to borrow money. If you cannot find it, just give the lender a call and ask.

How can your credit score affect your APR?

The higher your score, the lower your interest rate is. Let’s use a car loan as an example. Jon Doe and Jane doe go to the same dealership to purchase the same car for $25, 000 after the tax and dealer fees, etc.

Jane Doe

Credit scores- Equifax: 745, Experian: 770, Transunion: 798

Loan amount ($): $25,000

Interest rate (%): 3.5

Loan period (months): 60

Monthly payment ($): 455

Total cost of the car loan ($): $27,288

Not bad for Jane Doe, right? Now, let’s do the same for Jon Doe!

Jon Doe

Credit scores- Equifax: 545, Experian: 570, Transunion: 518

Loan amount ($): $25,000

Interest rate (%): 19.8

Loan period (months): 60

Monthly payment ($): 660

Total cost of the car loan ($): $ 39,574

Now, you see the importance of having a good credit score/report and how it saves you money.

How Do You Know the APR? The Truth in Lending Act is a federal law that requires lenders to disclose the APR whenever you’re borrowing money. Always look for the APR in the disclosures so you know whether you’re paying too much to borrow money. If you can’t find the APR, ask the lender.

How do you get a lower APR?

The most important thing you can do is maintain a "good" credit report/score. If your scores have improved since you obtained your credit cards, call the creditors, and asked for a lower APR nicely- the most they can say is not now. When it comes down to loans, you would most likely have to refinance it with another lender. The higher your credit score is, the lower your APR will be. This is one of the reasons it’s so important to work on your credit report/score before you borrow money, especially with mortgage or car loan.

Next time you have to finance anything, pay attention to the APR, and think about what you could do with the extra money you’ll be paying in interest!