Introduction to Annual Percentage Rate (APR)
The rate at which you pay an yearly interest for a loan or the interest that you receive in your deposit account is the Annual Percentage Rate or APR. Annual rate of interest or APR is applicable on any mortgage or loan and even on credit cards.
In more simple terms, annual percentage rate or APR is the amount you pay on an yearly basis for borrowing money. As a consumer, the Annual percentage rate or APR tells you a bottom line number that you would have to pay if you borrow money from that particular lender. So, APR becomes the criteria which you can compare across lenders before borrowing money.
However, it may not be easy for consumers to compare this annual rate of interest, as it is in the lenders’ power to decide what charges go into the calculation rate. Every financial institution is obligated to express their annual percentage of interest before signing any agreement.
How does the Annual Percentage Rate or APR work?
Every time you lend money in the form of a loan, be it car loan, home loan or education loan, you end up with a rate of interest that you have to pay on the amount of money you have lended. This rate of interest is the annual percentage rate.
The annual percentage rate calculates the interest that you pay on an yearly basis, this also takes into account the monthly payments made by you towards the loan amount.
Types of Annual Percentage Rates or APR
Based on the consistency of the annual percentage rate, they are of two types— Fixed annual percentage rate or Fixed APR and Variable annual percentage rate or variable APR.
Fixed Annual Percentage Rate or Fixed APR
When the rate of interest that you have to pay remains constant throughout the term of loan, it is known as fixed annual percentage rate or fixed APR. When the annual rate of interest or APR is fixed, the lender is obligated to pre inform the borrower of any changes in the APR.
Variable annual percentage rate or Variable APR
Variable annual percentage rate or variable APR is the exact opposite of the fixed annual percentage rate or fixed APR. If the annual percentage rate or APR is variable, the rate of interest which you pay towards your loan is variable over the term of loan. Variable APRs fluctuate often and are inconsistent.
