Know the exact use and **what does APR mean** along with difference between APR and Interest rate. Also go through how APR is calculated, difference between APR and APY followed by different types of APR.

As stated by CFPB (Customer Financial Protection Bureau), APR (Annual Percentage Rate) typifies the price to take loan.

APR is a very important consideration that help to compare and conclude which credit might be most advantageous or suitable. APR can help loanee to get more aware about decision making related credit card.

## What are APR and APY?

APR is Annual Percentage Rate and it is the rate of amount you pay for the loan including interest rate.

Somehow, you may have heard about APY, it stands for Annual Percentage Yield, it also named as EAR, Effective Annual Rate.

The cost of interest you will be imposed for your loan, the interest you will be imposed for you would earn when you save is the quantification of APY or EAR.

## What is the Working Principle of APR?

Most often credit card companies propose deferment periods for new purchases. If you pass on a balance from one month to another month, you will be rendered on the basis of A P R for the belated amount.

## APR Interest Rates

You might think Annual Percentage Rate are the same as interest rate or both are same. no, you are wrong here, the percentage charged on the principal loan amount is the interest rate.

But in the condition of A P R, it includes the interest rate with other cost, namely granter fees, closing costs, insurance, etc. The Annual Percentage Rate and interest rate are possibly the same if there are no granter fees.

For an example, let us assume you borrow $1000 at a 5% interest rate for one year. Then your monthly payment will be $8.33. By the completion of the year, you need to pay $50 in interest.

But APR is no simply 5% in above scenario. The main cause is that the interest added monthly. As the interest is applied to the loan balance each and every month including the annual interest.

So simply Annual Percentage Rate for this loan is 5.12%. This states that you need to pay $51.2 instead of $50.

## How are the APR Calculated?

For calculating APR, a formula is used by every bank. It is calculated on a daily basis or monthly basis. Annual Percentage Rate is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied. It is calculated by

- Total loan amount.
- The number of days is in the year.
- Interest rate of loan.
- Loan related fees.

Now let’s have a look on the formula to calculate the Annual Percentage Rate in a simple way:

**APR = (1+R/n)^(n*t) – 1**

- R – Interest rate
- n – Compounding frequency
- t – loan term in years

## What is APR on a Credit Card?

APR on a credit card also the same that we discussed in the beginning of the article. But APR of a Credit card varies from card to card and lender to lender. It also depends on the various factors.

Some of the major factors are your credit score, card type and the duration of time that you are using.

## What is the difference between Fixed APR and Variable APR?

Usually, a fixed Annual Percentage Rate does not change over the period of loan. But it does not signify the interest rate will not ever change, you must be notified by the granter if many changes occur.

Rate of interest, mainly lending rate, is consolidation of variable APR. It may vary when the lending rate increases.

## Different Types of APR

Here are a few A.P.R you must know about. With the different types of APR customers would be more conscious and can select their needs based on their purchase. Different APR depend on your buys.

**Purchase APR :** The rate of interest charged on your purchases which you would have paid with your credit card.

**Cash advance A P R :** There are numerous ways to get money via cash advance through banks, ATM and checks.

Cash advances have a higher rate of interest than normal credit card come to have some additional cost. As a cash advance is a temporary loan, it gives you instant purse from banks or finance companies. But you would have to pay extras for the service.

**Penalty A P R :** If you fail to pay due on time or if you contravene the terms and conditions of the time can lead to the penalty Annual Percentage Rate. If you have skipped more than one payment constantly, then you would enforce to pay penalty Annual Percentage Rate which is considerably higher than usual.

**Introductory APR :** It is a kind of a promotional APR which gives you low interest rate than usual APR with a finite period of time.

**Balance transfer A P R :** In this service, you can easily transfer the rate of interest on granted credit card to other credit card or loan/lends.

## Major Points to Prevail a Lower APR Card

- Principals of CFPB (Consumer Financial Protection Bureau) can help you to prevail a lower Annual Percentage Rate card by maintaining healthy credit score.
- Avoid late payments, it can have adverse effects on your credit card.
- Do not cross your credit limit or do not come close to your credit limit.
- Paying lends on time can increase your credit.
- Avoid unwanted credit, request only for the needed credit.

## What is Purchase APR?

Nearly, credit cards come with various kinds of attached APR. The rate of interest charged on your purchases which you would have paid with your credit card is said to be purchase APR.

Avoid paying interest on the purchase Annual Percentage Rate by paying the full balance at the time with no due. If you fail to do so, you will get the deferment period of time also known as grace period, it is the time between the due date and monthly billing cycle.

## What is Good Purchase APR?

Your annual percentage rate totally depends on your credit score you maintained. The higher the credit score you maintain the lower the Annual Percentage Rate you have to pay. The lower credit score may lead to paying a high APR.

An average APR is approximately 18% to 20% with a typical credit score. APR credit card with 28% to 30% is having a bad credit score. And a good Annual Percentage Rate with credit score can have the A.P.R with credit score can have the Annual Percentage Rate as low as 12% to 13%.

## What is a Good APR for a Car?

Good APR for a car is completely depends on the two factors and that are your Credit Score and the type of car you want to buy including the price of it. If you have a excellent credit score, then lender provides you less A.P.R like below 5%.

But if you have poor credit score then APR may reach to 10% also. Finalizing the APR is totally depends on the lender. So before buying a car, check different lenders and choose a better one. On an general case, Good APR for car is 4 – 5%.