Hello and welcome back. I’m Judy Copenbarger and I’m so glad you could be here.

Have you ever been shopping for a credit card or a loan? Not only are there so many options out there probably being sent to you in the mail every week, asking you to sign up, but when you actually want to make a decision there are a lot of new terms that make it difficult to understand what you’re really getting into.

Today I’m going to answer a question that can help you begin this process informed and more confident. And the question is: What is APR and how does APR work?

So let’s shed some light on that for you.

What is APR?

confused man scratching head

Good question. I know I was confused by this before, so I get it. APR is short for Annual Percentage Rate.

You’ll see this percentage when you’re shopping for a new credit card or a personal loan of any type. You’ll also see it when you borrow money on credit. Lenders such as your local bank or credit card company will show you a percentage rate. This is the interest you must pay on an annual basis, and this is the fee for the convenience of being able to borrow money from them. formula for apr

So let’s say you’re on board and you understand that this is a convenience fee that you must pay to borrow the money, but you still don’t understand APR. There are a few more things that you’ll need to know.

Representative Rate

Let’s say you find a credit card that has benefits you would enjoy and the APR is 19.24%. So understand that this number is what is called a representative rate.

What this means is that the rate that you see advertised is only given to over 51% of the applicants. There is no guarantee of the advertised rate, and this may be the greatest factor in the success of your loan.

How credit scores affect your interest rate

credit score stamp

This is why your credit score is so important because when you want a loan or a new credit card, it can save you money by getting you a better rate.

A better score can often mean better rates or at least achieving the advertised rates of a loan or a credit card because you will appear as a more reliable borrower in the eyes of the lender. Curious about how to do that? I recommend reading “How To Improve Credit Score The Right Way“.

What is the purpose of APR?

Okay, Judy, I now understand the meaning of APR, but why does it exist in the first place?

Well, to clear that up, it’s good to know the purpose of an APR is to establish clarity of what you can expect to pay completely before you agree to anything. This way you can compare rates, shop around for the lowest APR, and make an informed decision. APR is a way to determine the exact cost it takes to borrow money.

Hidden fees of credit cards and loans

person peaking through blinds

Some people ask me, “are there any hidden fees? Are there any things that I should be looking out for?”

Well, yes, here’s what to watch out for because believe me, it’s not at all transparent.

Credit cards and loans are big business and you really need to be careful. Be diligent to watch out for changing rates. They can change before you apply and they can change after you apply, so find out exactly how long that APR is guaranteed for and if it will ever change and if so, by how much.

Also, watch for compulsory charges.

Sometimes these charges are built into the APR, but not all are. There are other necessary government regulations and taxes that typically add fees. Sometimes you deal with mandatory insurance charges built-in, and these are things you need to determine before agreeing to anything.

Now that you have some clarity on what annual percentage rate means and how it helps you determine the total cost of a loan, use this knowledge to make informed decisions.

If you enjoyed learning with me today, please share this article with a friend or loved one who could use a little financial help as you did.

You can comment below and follow my newsletter for more articles on everything about personal finances.

I’m Judy Copenbarger. God bless!

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