Annual Percentage Rate for Beginners
What an annual percentage rate is and how it could affect your business
If you're considering taking out a business loan or signing up for a credit card, you need to have a strong understanding of what annual percentage rate, or APR, means. It is the standard way to express a loan rate and is required on all credit card applications in the United States.It's best to learn all you can about the annual percentage rate before you even considering borrowing money in a commercial capacity. Consider the following as a guide to annual percentage rate for beginners:
1. You should know how an annual percentage rate on a loan is calculated.
2. Learn the difference between fixed and variable annual percentage rates.
3. Discover useful ways to compare several annual percentage rates.
Learn how an annual percentage rate is calculated
The term annual percentage rate is somewhat self-explanatory. It is the rate your lender will charge you for borrowing over the course of one calendar year. For example, if the lender charges 2% per month, the annual percentage rate will be 24%. If the loan also has points or fees, they are added to the APR, which is especially true with building loans. This can make it difficult to calculate your actual rate on your own. Luckily, there are programs that can help.
Try: Visit Debt Consolidation Care's website for a more in-depth explanation of what an annual percentage rate represents. Then check out eFunda's rate calculator to help you find the annual percentage rate on more complicated loans.
Understand the difference between fixed and variable annual percentage rate
While a fixed and variable annual percentage rate are calculated in the same manner, the difference between the two can have a profound affect on your loan. While fixed rates remain relatively stable over time, variable rates can change at any time without prior notice. Variable rates are most common on credit cards and mortgages, but can also be present on other lines of credit.
Try: Read the Federal Reserve Board's article on choosing a credit card to help you decide if you'd benefit more from a fixed or variable rate and the legal requirements of each. Then visit Evolution Finance's Card Hub website to read more about fixed and variable rates, as well as intro APRs and default rates.
Learn to determine a good annual percentage rate
Once you have a basic understanding of how it works, you need to learn how to compare more than one annual percentage rate. For beginners, make sure you're comparing apples to apples. This is easy to do with credit cards, since all applications are federally mandated to contain a rate box, or Schumer Table, but with personal or mortgage loans it can be more tricky.
Try: Read Quicken Loans' article on the difference between interest rate and APR so that you never confuse the two in your comparisons. Then go to Farlex's article on comparing the annual percentage rates offered by different lenders. Talk to several financial institutions before taking out your loan to ensure that you get the best deal possible.
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