A Guide to Understanding Loan Rates: What Is APR?

Nearly all adult consumers have heard the acronym APR, especially if they carry or have applied for a credit card. And most of us know that it stands for “annual percentage rate.” But do you know exactly what the term means and encompasses? And are you aware that, contrary to common misconception, the term is not always interchangeable with “interest rate”? (The two terms’ meanings are similar, but they’re not always identical.)

If you’re ready to improve your financial smarts and learn more about this term, which is especially important when shopping for or taking out a loan, read on for a closer look at APR and what it can mean to you as a consumer.

What is APR?

APR represents the total yearly cost for a consumer to borrow money via a credit card, mortgage, car loan or other personal loan. And if you’re shopping around for the best credit card or personal loan to meet your financial needs, it’s an important concept to understand, as it can help you determine which cards or loans you’re considering will cost you the least and most when you carry a balance.

The APR figure is designed to act as a baseline number that borrowers can use to compare the costs of various credit cards and other loans they may be considering. It is expressed as a yearly percentage that includes the annual interest rate, plus any additional costs such as lender fees, loan insurance and closing costs. And because the APR includes both the interest and other fees, it can paint a more complete picture of the cost of borrowing than the interest rate alone can.

What is the difference between interest rate and APR?

The main difference between interest rate and APR, which are both expressed as percentages, is that (as noted above) the APR includes added fees and costs beyond the interest rate. While the interest rate tells you the percentage of the loan’s principal you’ll be charged each year to borrow the money, the APR includes the interest rate plus any additional fees the lender may charge.

In situations where the lender charges no additional fees for the loan beyond the interest rate — as is the case with most credit cards — the interest rate and APR are actually the same, making the terms interchangeable in these cases. (It should also be noted that with most credit cards, the interest on the funds borrowed can be avoided altogether if the borrowed balance is paid off on time each month. If you do carry a balance from month to month, you’ll be charged interest on the unpaid balance that is carried over between statements.)

How is APR calculated?

To calculate a loan’s APR, you’ll need to collect the following numbers:

  • The total interest charges on your loan, which should be available in your loan agreement.
  • Any fees that apply to your loan, which can typically be found in the loan’s terms and conditions.
  • The original loan amount, also known as the principal.
  • The total number of days in the loan term. (Since the APR represents an annual cost of borrowing money, for your loan, you’d multiply 365 by the number of years in the loan term. Or for loans with terms of less than a year, you’d multiply by the number of days.)

Once you have these figures collected, to calculate the loan’s APR, you’d do the following:

  1. Calculate your total interest charges. For loans charging simple interest, this is done by multiplying the loan’s principal by the interest rate and the number of years specified in the repayment term.
  2. Add the total interest charges calculated above to any fees you are required to pay on your loan.
  3. Next, divide the sum calculated in step 2 by your original principal balance.
  4. Take the figure obtained in step 3 and divide it by the number of days in the loan’s term. (As an example, for a three-year loan, you’d multiply 3 x 365 to calculate that there are 1,095 days in the loan’s term.)
  5. To get the annual rate, you’d multiply the figure obtained in step 4, which is your daily rate, by 365 (the number of days in the year).
  6. Lastly, you’d multiply the annual rate you calculated in step 5 by 100 to get the annual rate as a percentage.

For credit cards, the APR is determined by the card issuers, who are required by law to disclose how they calculate their credit cards’ APRs. When you’re shopping for a new credit card, the APR data for any cards you’re considering is typically placed prominently among the card details found on the card issuer’s website, as well as in other promotional and resource materials. And when looking for the APR of a credit card account you already have open, you can typically find it in numerous locations, including on your credit card statement, in your credit card account’s terms and conditions, and on the card issuer’s website. In addition, this information can in most cases be procured by speaking to a customer service representative.

At The Southern Bank, we pride ourselves on offering friendly, personalized service to all of our customers — and that includes providing guidance when you have questions about any of our banking services. To learn more about our Personal Banking services ranging from Personal Checking and Personal Loans to Savings & Money Market, Certificates of Deposit (CDs), Mortgages and more, check out the Personal Banking page on our website or visit one of our local branches for friendly, in-person service with a smile.

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