6/15/2022
When applying for a personal loan, credit card, or other financing in the United States, you should know a few details so you can compare how these banking products differ. One such element is the APR or Annual Percentage Rate.
If you want to find out more about its details, we explain the most relevant points for your personal finances.
What is the Annual Percentage Rate (APR)
APR is an annualized value that is used to calculate how much a certain credit card or financing could cost you. Annual Percentage Rate should not be confused with Nominal Interest Rate (NIR), because they are different concepts that are linked to each other.
It is important to note that:
In general, the APR includes all the expenses associated with a banking product during a year. This means that it is made up of the NIR, the fees and other charges that the bank has designated for a loan, mortgage, credit card, among others. Depending on the instrument and conditions, the Annualized Percentage Rate will not always include all commissions.- Instead, the Nominal Interest Rate refers to a percentage calculated per year that is paid in monthly installments on the balance you owe. Unlike the previous concept, it does not include other additional expenses that the banking product could have. It is an indicator that reveals a part of the total amount to be paid, but it is an incomplete image.
As additional data, the NIR is always equal to or lower than the Annual Percentage Rate. Sure, this is easy to understand because the second includes the first and other extra charges. Depending on the financial institution or the instrument, this percentage rate can be variable or fixed.
APR Calculation
Taking the account through the Annual Percentage Rate is not complicated. It would be enough to know the corresponding percentage and the amount of personal credit. We can exemplify it like this:
- Suppose you want to borrow $10,000 at an APR of 7%. Multiplying those values and then dividing by 100, you get $700. This last amount is the one you have to add to the original amount to know what you are going to pay for each year.
- There is another way to calculate the APR for credit cards. In this case, you take the annual percentage rate, divide it by the days of the year, and multiply that result by the balance of the debt. For example, an APR of 27% ÷ 365 days = 0.0739 x $3,000 dollars, that gives 221.7 interest for each month of billing.
Factors influencing the Annual Percentage Rate
When you apply for a personal loan or other type of financing, you know that banks ask you for several requirements. One of them is the credit score, the lower it is, the more expensive the percentage that will be applied to you.
Even if you have a good credit history, that doesn't mean you're going to get low interest rates either. Much of this depends on the economic policies of the FED (Federal Reserve), in charge of raising or lowering the official interest rate on the dollar, which is used to take care of the financial system. The value increases to counteract the effects of inflation and decreases to stimulate borrowing.
As the economy consolidates, the Federal Reserve makes access to loans more expensive to control the loss of purchasing power. During the economic crisis of 2008, the official interest rate was almost 0%, which favored requesting any type of financing. Now that the landscape is returning to normal, it is more difficult to find such cheap credit.
Negotiating the APR
When we talk about financing, there is always the possibility of getting better conditions. Since the Annual Percentage Rate includes several charges, you can negotiate the reduction of the most important ones. There are 2 main options:
- Reduce the Nominal Interest Rate (NIR). This strategy could require a refinancing of your debt, which implies having to pay the commissions of the new personal loan again. Still, you would have to check if the APR warrants it.
- Ask for a discount if your credit improves. Anytime your credit score goes up or the Federal Reserve lowers the benchmark, consider requesting a reduction in the Annual Percentage Rate. You can negotiate with the original creditor or find another lender for better terms.
The concept of APR is important for you to take care of your personal finances and to know which are the most attractive banking products. If you are looking for the best options, use the Busconomic comparator/search engine.
En español: Qué es el APR y cómo se calcula