What does APR mean?
5 min read
APR means Annual Percentage Rate. It’s a common acronym you’ll hear related to borrowing money. In simple terms, you can think of APR as the price you pay to borrow money.
If you want to be better with money, understanding APR is a great place to start especially if you use credit cards or are considering applying for a loan.
The good news is that Spruce is here to help! We’ll define how APR works, different types of APR and related concepts.
How does APR work?
If you’re wondering how APR works, here’s an example…
A credit card’s interest rate is the rate you pay for borrowing money. Credit card issuers often set an annual (yearly) percentage rate, or APR, and then charge you interest based on your daily balance.
Sometimes, you can avoid paying interest on items if you pay in full by the due date. However, if you don’t pay off certain payments and carry a balance on your card, you’ll end up paying the agreed-upon annual interest rate, or APR, on your outstanding balance.
What is a good APR for a credit card? For other purposes?
Most credit cards have APR ranges. Your APR depends on the type of credit card and your credit score. So, the higher your credit score is, the lower your interest rate should be.
Word to the wise: If you see a low APR advertised on a credit card, don’t assume that every borrower gets this rate. The advertised rate could be the best available APR (for borrowers with the highest credit scores).
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What is a good APR for a car?
A good APR for an auto loan is somewhere around 5% or lower. But several factors will influence if you’re able to secure a car loan at that rate, including the age of the car and your own credit score.
In the market for a new car? Review our post on how much to spend on a car.
What is purchase APR?
Let’s jump back to APR terms related to credit cards. You may have seen an APR for purchases on your credit card statement. This is referred to as the purchase APR. You might wonder, “what is purchase APR and how is it different from other types of APR on my statement?”
Purchase APR is the interest rate for when you carry a balance. It’s what most people think of when thinking of credit card APR. Keep in mind, if you don’t have an outstanding balance on your credit card each month, you may not have to worry about purchase APR.
What other types of APR are there?
Many credit cards have different APRs for different types of transactions. Your statement may show different APRs for cash advances (if you use your credit card to get cash at an ATM or at a financial institution), balance-transfers (moving debt from another credit card), an introductory-offer APR for a qualifying transaction (a lower APR offered for a set timeframe), and a penalty APR (what the purchase APR can increase to if you make a late payment).
There are additional APR terms that apply to credit cards as well as loans. We’ll move on to those next.
What is variable APR? What is fixed APR?
For credit cards or loans, you may encounter the terms variable APR or fixed APR.
- Variable APR is a rate that can fluctuate based on an economic index such as the prime rate (a rate published by the U.S. Federal Reserve).
- Fixed APR is not tied to an economic index, but that doesn’t mean it can’t change. A fixed APR can change, however, only after the issuer of your loan or your credit card company notifies you first.
What is the difference between interest rate and APR?
We’ve described the difference between APR types, but what is the difference between APR and interest rate? To understand the difference, it helps to clarify if you’re talking about credit cards or loans.
- For credit cards, interest rate and APR are generally the same, it’s the rate you’re charged on any balance that you carry.
- For loans, interest rate is charged on the principal loan amount while APR is the interest rate plus additional fees and costs (examples include lender fees, closing costs, insurance).
APR vs. APY
When talking about interest calculations, you may have heard the acronym APY along with APR. What’s the difference between APR vs. APY?
- Annual Percentage Rate (APR), as this post has outlined, is the amount of interest charged when you borrow money. It does not factor in compounding.
- Annual Percentage Yield (APY) is the annual compounded rate of interest. Compound interest is the interest earned on top of the interest. APY is generally a term you’ll hear when reviewing investment products like savings accounts, money market accounts, etc.
Bottom line — there are many factors to consider when understanding APR. From a good APR for a car to a good APR for a credit card, it’s important to understand how much it will cost you to borrow money. Understanding some of these terms is a good place to start.
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This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.
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