Scroll Top

Annual Percentage Rates

Home | Glossary | Annual Percentage Rates

Sometimes, life throws financial challenges your way. If you need to borrow money, you’ve likely seen the abbreviation APR. An Annual Percentage Rate (or APR) is a crucial element of all loans, but what exactly does this mean for you and your financial needs?

Learn more about what annual percentage rates are, how to calculate your APR, and why they’re essential for loans.

What Exactly Is an APR and Why Does It Matter?

An APR is the yearly interest rate lenders charge you on top of the money you borrow. As you repay a loan, you’ll pay an additional amount based on the rate you secure at the beginning of your loan. The APR may include fees such as an initial lending fee, processing fees, or other fees the lender includes.

As a borrower, you can have peace of mind knowing you’ll get honest information from lenders. An act passed in 1968, called the Truth in Lending Act, requires lenders to show the APR they’re offering, and borrowers must know about it before signing a contract.

APRs can be fixed, meaning the rate won’t change over the life of the loan. Or, the rate may be variable, meaning it’s subject to change.

Before you commit to a lending agreement, compare APRs between different lenders to ensure you’re getting a competitive rate and are choosing a reputable lender with years of experience.

How Much Will I Pay Based on the APR?

Here’s an example of an APR calculation showing how much your loan will cost: If you borrow $1,000 with a 4% APR and have a year to pay off the loan in monthly increments, you’ll pay $85.15 per month and pay back a total of $1,021.80 by the end of the loan term. Remember that many lenders include other fees in the loan that, when added to your loan, will affect this amount.

How Do I Calculate My True Annual Percentage Rate?

Lenders use this formula to calculate APR:

APR = [(Interest + Fees / Loan amount) / Number of days in loan term)] x 365 x 100

a percentage block on top of moneyTo calculate your APR, add the lender’s fees to the total amount of interest you’ll pay over the loan term. Divide that amount by the loan amount. Divide that total by the number of days in the loan term. Multiply this amount by days in a year and then multiply that total by 100.

This formula may seem overwhelming, but companies must calculate the total amount you’ll pay for your loan and provide the APR in percentage form.

What Factors Affect My APR?

Your APR can vary based on the lender and your financial history.

The following factors can affect an APR:

  • The Length of the Loan: If you repay a loan over a long period, the rate may be lower than if you pay it off faster.
  • Your Credit History: If you have a higher credit score, you demonstrate a history of timely payments and can often secure a lower rate.
  • The Individual Lender: Each lender will have slightly different rates based on the size of their business and the deals they offer.

Does the Interest Rate Matter If You Pay on Time?

Your interest rate always matters. Even if you pay on time, you’ll accumulate interest on the borrowed money. The rate will not lessen based on whether you make payments on time. However, you may have to pay more for late payment fees.

Power Finance Texas Has Loans Just For You

Financial obligations can pop up unexpectedly. Power Finance Texas offers online personal loans with a simple application process. You can get up to $1,250 in your bank account in as little as a day, so you never have to worry about where you’ll get the money in an emergency.

Visit the Power Finance Texas site and start the application process.