What Does APR Mean?
Ever wonder how three letters could drastically affect your monthly payment on your loans? When applying for any type of loan there will be an interest rate tacked onto it, followed by three letters… APR. What do those letters mean and how does it affect your money?
What Is APR?
APR stands for Annual Percentage Rate and is usually tied to a personal loan, mortgage, auto loan, or any other type of loan. Whenever you need to borrow money from a financial institution, they tack on an interest rate to collect a fee for loaning out the money to you. Expressed as a percentage, you pay back a little extra with each loan payment. APR is the cost of borrowing money from a financial institution.
When you apply for a loan, several factors go into what APR you are offered. Factors based on your credit score, credit history, and more, underwriters determine whether you receive a fixed or variable APR rate. The different rate types affect how much you are agreeing to pay back every month. Before signing on the dotted line, make sure you know what you are signing up for.
Fixed – Usually, the APR will not change while you have the loan. Whatever you agree to on day one will be the same rate you end with when you make the last payment for the loan. Note: Sometimes the APR does change, but financial institutions have to notify you before this change occurs.
Variable – The APR can change based on the prime rate. So, while you may have a lower APR at the start of your loan, it could increase over time.
Show Me The Numbers
Congrats! You are ready to make a big purchase. For this example, we are going to pretend you are buying your dream house for $200,000 (what a steal!). Along with the purchase price, and in this case the principal amount, you have fees. When getting a mortgage, there are lots of little fees. In this example, your dream house has these fees:
- Origination fee - $800
- Document preparation fees - $200
- Underwriting fees - $500
- Closing costs - $2,000
All these fees add up to a total of $3,500. And since this is your dream house, use the interest rate of 4.5% APR in this example, and hold the loan for 30 years. Using a mortgage-specific APR calculator, you owe approximately $1,013 each month.
What’s It Mean For You?
Next time you need to borrow money from a financial institution, ask about the APR rate. This will affect how much you pay the credit union or bank back each month. To get the best APR rates, keep your credit score in check. You can learn more about how your credit score affects your loan applications here.