Understanding APR and Interest rates — Bright Money

APR and interest rates

bright-money-difference-between-apr-vs-interest-rates
APR and interest rates

It’s easy to confuse APRs and interest rates. Some people think they’re the same thing.

But there’s a significant difference: because APRs include fees as well as the interest rate, they more accurately reflect the overall costs of a loan or credit card.

What is an interest rate?

Interest rates typically indicate the amount of interest you’ll pay in a year. It’s tabulated as a percentage of the amount you’ve borrowed, and it typically applies annually. This is the baseline amount your lender charges you for the money you’ve borrowed.

Here’s an example: For a new loan of $1,000, with a 12% interest rate, you’ll pay $120 in interest over the course of a year. For many loans, as well as most credit cards, that $120 would be paid in installments, resulting in $10 interest payments each month. You’ll usually make those interest payments in addition to monthly payments against the $1,000 you’ve borrowed. (In this example, the $1,000 is referred to as the “principal” you’ve borrowed.)

So each month, ideally, you’re paying back a portion of the principal as well as an interest payment — which is determined by your interest rate.

What is APR?

APR stands for “ Annual Percentage Rate.” This refers to how much you’re charged every year for your loan or credit card balances — and it includes both the interest rate as well as some fees.

Because your APR includes some fees, it’s a more accurate number to use when comparing loans and credit cards. It’s typically applied annually and paid in monthly installments (as described above).

Annual fees, processing fees and origination fees are often included in APRs, when they’re applied. But not all loans and credit cards apply or charge those fees, and you’ll encounter different fees with different kinds of credit — many of which aren’t included in your APR.

For example, car loans can have special fees, like dealer fees and transfer fees. Home loans typically include several fees, from origination fees to document fees to broker fees. These are often paid up front and not included in your APR. When comparing your options, note which fees are included and which ones are paid separately.

What are different APRs on credit cards?

When comparing credit cards, you’ll often see more than one APR on each card. That’s because the different ways you use your card can result in different APRs. With that in mind, compare APRs closely: some APRs are featured in promotions, others are hidden in fine print.

Here are some common APRs to note:

  1. Review your statement to find the APR on your card
  2. Divide your APR by 12 (the month in a full calendar year) to determine the monthly percentage
  3. Find your card’s current balance and divide by the monthly percentage. The result is that month’s APR payment.

How do I calculate my APR?

Here’s how to calculate how monthly APR payments on your credit card:

For example, with an APR of 12%, you’ll pay 1% of your balance each month as an APR payment. But your actual monthly APR payment will change as your monthly balance shifts.

Sometimes different APRs apply to different portions of your balance, as seen in the above list of different kinds of APRs. In that case, calculate the monthly APR in the same way, but apply it only to the appropriate portion.

How can Bright help with my APR?

Bright is brilliant at managing credit card debt, finding the fastest, smartest way to lower your interest charges and pay off your cards.

If you don’t have it yet, download the Bright App for the App Store or Google Play, connect your checking account and your credit cards, and set a monthly goal. Bright will analyze your finances and start paying off the card with the highest interest charges (while also paying the minimum due on your other cards). Bright works automatically, making payments for you, always on time, so you also never pay another late fee.

Recommended Readings:

What is APR on a credit card?

How can I reduce my student loan debt?

Originally published at https://www.brightmoney.co.

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