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Calculating Annual Percentage Rates

Calculating Annual Percentage Rates

When you are borrowing money, one of the main numbers to consider is the annual percentage rate, typically abbreviated as APR. The APR is the percent of the borrowed amount that you are expected to pay each year in interest and fees, spread over the life of the loan.

The APR is slightly different from the interest rate because the APR also includes required introductory fees in the calculation. For example, on a mortgage, you have loan origination fees and closing fees that you must pay to get the loan. The APR helps you understand how these fees affect your total costs, assuming you keep the loan for the full repayment term. If there are no introductory fees, the APR is the same as the annual interest rate on the loan.

Types of APR

APRs come in two main types: fixed and variable. A fixed APR does not change on a regular basis, but a variable APR will adjust depending on market factors. Some loans, especially credit cards, can have several different types of APRs. These include:

  • Introductory APR, which is charged only for a short period, defined by the lender.
  • APR for different ways to borrow, like a purchase APR, cash advance APR, and balance transfer APR on a credit card.
  • Penalty APR, which gets charged if the borrower misses a payment and triggers an increased interest rate.