What is an APR Rate, and How is it Calculated?

At some point in your life, if you haven’t already—possibly many times—you’ll apply for a loan. You decide what you want to buy. You find a lender that will give you a loan to pay for it. You apply. You get approved. You signed on the dotted line. But how well do you understand all the loan terms that you agreed to in your loan agreement? And do you understand the APR that will tack on fees throughout the term of your loan?

The fact is that loans are full of complicated terms that many people don’t understand. Instead of seeking to understand, they gloss over it, looking at just one number—their monthly payment—to see if the loan is one that they can afford. Yet you should ask yourself, what is an APR rate? And how do you calculate the APR rate? Because the APR is a critical piece of information, and when you don’t do your homework before you apply for the first loan you come across, you could be paying far more than necessary.

What is an APR Rate?

It’s important to understand the basics of an APR rate. Otherwise referred to as interest (though it is only part of the calculation), this is the fee you pay to the lender in exchange for the funds they loan to you. The lender is taking a risk by offering that money to you, and they have administrative fees to cover that are involved with processing your loan. Plus, let’s face it, lenders are in the business of making money. The APR you pay on your loan helps lenders to loan you money and helps them to make money by offering that service to you.

That said, just how is your APR calculated? Here’s what you need to know.

APR, or Annual Percentage Rate, represents the real yearly cost of borrowing money, including both interest and certain fees associated with the loan. Understanding how APR works is a must for any borrower, as it reveals the complete cost of a loan beyond just the interest rate. This rate allows for a standardized comparison among lenders, ensuring borrowers can see which loan is more affordable in the long run.

Calculating a loan APR involves adding certain fees and additional costs to the interest rate and spreading this total cost over the life of the loan. This means that a loan with low interest but high fees might end up with the same APR as a loan with higher interest and no fees.

Macroeconomic factors like inflation can also influence APR. When inflation rises, lenders may increase rates to maintain their profit margins. This shift means that the cost of borrowing can grow, impacting the amount you pay on a loan.

What Should You Keep in Mind about APR Rates When Applying for Loans?

As we shared above, many borrowers look only at their proposed monthly payment when agreeing to loan terms. While this is an important factor as you need to have the ability to work that payment into your monthly expenses, it’s not the only thing to consider. Here is what else you need to pay attention to.

Determine APR Rate Range When Shopping Lenders

Before settling on a loan, compare the APR offered by various lenders. Each lender might offer different rates based on their criteria and your creditworthiness. Understanding the range can help you identify the most cost-effective option.

Check if APR is Fixed or Adjustable

Is the APR fixed, remaining the same throughout the loan term, or adjustable, meaning it could rise or fall based on market conditions? Knowing this helps you anticipate potential changes in your payment amounts.

Make Sure to Include APR in Long-Term Calculation of a Loan

Always consider the APR when calculating the total cost of your loan. A lower upfront rate might seem appealing, but without including the APR, you might end up paying more in the long run due to hidden fees and charges.

Take Steps to Lower APR If Possible

Explore ways to lower APR to reduce your borrowing costs. Options might include using a co-signer to improve your loan eligibility, making a larger down payment to decrease the borrowed amount, or improving your credit score before applying for a loan. These strategies can significantly decrease the total interest you pay.

Get Started Today with a Loan from Cash Store 

Cash Store provides installment loans, designed to help you get the funds you need, when you need them. Whether you are funding a home or car repair, need emergency funds, or are planning a family vacation, our loans are designed to help those with good credit and those working on building their credit.

Check out our loan options today and click on pre-qualify to get started. We look forward to assisting with your loan needs.