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If you're using a credit card or taking out a mortgage on a home, you may need to use more money than you currently have. If you're given credit, the lenders who give you that credit expect you to pay the premium back, in addition to a finance charge for the luxury of being given money. This finance charge is called APR. The following graph should help you compare different APRs. Use this information as a guidepost when shopping for a mortgage. However, you should always use an online APR calculator to check your exact APR before signing on a loan. The directions to do so follow this graph. Note how,in most cases, the APR is almost identical to the interest rate, but changes depending on the amount of finance charges. This difference is why you must compare APR when shopping for a loan. APR For Different Loans and How it Affects Total Cost Total Loan Interest Finance Charges APR Total Amount Paid $100,000 3.50% $1,000 3.5804% $163,272.65 $100,000 3.75% $1,500 3.8720% $169,222.44 $100,000 4.00% $5,000 4.4089% $180,462.98 $100,000 5.00% $10,000 5.8612% $212,581.36 APR is the annual rate you pay on credit or loans. For example, if you take a $1,000 loan, and your APR is 10%, at the end of the year you'll owe $100 (10%) of your $1,000 premium. If you want to know the monthly periodic rate, just divide your APR by twelve, 10%12=.83%{\displaystyle {
rac {10\%}{12}}=.83\%}, to find out what your APR is for every month. You can also divide it by 365 to find you daily APR. Different banks will calculate APR over different times, and this affects how much they charge you. Note how a yearly APR is higher than monthly or daily, but is ultimately cheaper: Monthly, Yearly, and Daily APR and the Effect on Total Cost for a $100,000 Loan Compound Type Interest Finance Charges APR Total Amount Paid Yearly 4.00% $5,000 8.1021% $110,412.17 Monthly 4.00% $5,000 7.8888% $110,512.24 Daily 4.00% $5,000 7.8704% $110,521.28 APR comes in three flavors. There's fixed, variable, and tiered. This simply means that the interest rate you pay can be changed depending on your current debts or the bank's whims. As such, fixed are usually the safest bets, since you will always know what you're paying. Fixed APRs remain constant for the life of the loan or the credit card. Variable APRs can fluctuate daily, leaving the debtor in the dark about how much interest she's paying. Be very careful with variable APR. Tiered APRs depend on what tier the debt falls into, raising and lowering depending on your current debt. For example, your APR might be 4% for debts below $1,000, but raise to 7% if you cross $1,000. That's not an insignificant sum, especially if you're unable to pay off the principal quickly. Average fixed rates hover slightly below 14%, while average variable rates hover slightly above 14%. If you spend $500 on your credit card but pay off the entire balance by the due date, APR is not calculated on your money. To avoid paying interest and to better your overall FICO credit score, make monthly payments on time and in full.
Understand that it costs money to borrow money. Compare different APRs based on the total loan, interest, and finance charges. Know that APR can be broken down into monthly or daily interest payments. Know the three types of APR. Understand that the average APR is about 14%. Know that you will not be charged APR if you pay off your monthly credit card balance in full.