What is an Annual Percentage Rate (APR)?
Why you need Annual Percentage rate?
Interest rates are calculated based on the amount given as loan. In reality, the actual amount got as loan is far lesser than this amount. This is due to the various charges paid initially by the customer when getting a loan. So the Annual Percentage Rate depends on the actual amount received by the customer rather than the entire amount of loan. This rate is higher than the rate of interest. This rate helps in proper comparison of loan programs and credit in real terms.
Uses of Annual Percentage Rate
The rate is primarily used as an evaluation tool and comparison of various programs. The rate depends on points gained or lost by the customer on the loan and also on the prepaid charges paid by him. They are mostly used in advertisements about Credit History
, Credit Rating
, employment or any judicial purposes. The manner by which the Annual Percentage Rate be displayed is in such a way that the rate should not be confused with any other rate. They should specify it is APR rate clearly distinguishing from other data.
Changes in Annual Percentage Rate
The Annual Percentage Rate is subject to change based on the contract signed during the transaction. If it specifies that it is a fixed rate then it means the rate cannot be changed. Some contracts have flaws like phrases like “adjustable rate” or “rate based on….” Then the APR change is legal. So care must be taken before signing contracts like these which are ambiguous and misleading. There are some transactions that might have a variable APR based on the history of the customer. These loans can also be refinanced so it proves to be rather effective. The credit card APR is also susceptible to change according to the interest rate. These APR are usually calculated based on the Interest rate
. The APR gets compound increased on investments since the profits on the principal also adds on to it.
Not applicable everywhere
The Annual Percentage Rate is however not the correct tool when comparing mortgage rates. The mortgage rate depends on the time duration of the mortgage. Since for shorter mortgage, the APR shoots up considerably than on a mortgage for a longer period of time. The mortgage plans must be judged on the lowest amount of interest rates than Annual Percentage Rate. Nominal annual percentage rate in credit cards is the rate that is charged when the purchases are made on the credit card. There is no compounding of interest. APR depends on compounding of interest where you will pay interest for interest of previous payment. The rate increases substantially when a payment is missed since the interest is charged on two months. The customers should be aware of the dealings with credit card and lots of details are hidden in the fine print. Annual Percentage Rate is an effective method to measure how much interest you pay in reality thereby very effective in comparison of schemes. Interest rates and Annual Percentage Rate must be used wherever necessary to help the customers.