Whether you are seeking business loans or personal consumer loans, understanding the basics of that loan is important. One of the basics associated with almost all loans is APR, which stands for Annual Percentage Rate.
Understanding APR is important to both business loan seekers and consumer loan seekers because this formula allows you to compare one loan against another. Doing so allows you to make the best loan decision.
The annual percentage rate is composed of many factors. These include: the current interest rate that you are required to pay, the time length of the loan, the full amount of each payment, the associated fees that are a part of the loan or the loan process, and any mandatory insurance premiums that are associated with the loan.
By law, lenders must inform you of what the APR is before you sign the loan. Consumers should keep in mind that APR can vary between lenders, which is why it is good to check with each lender in order to find the most affordable loan. Generally, the lower the APR is on the loan the less it will cost you over time.
Here are some examples of how APR works when compared to what is often called simple interest.
If you were to borrow $2,000 for one year at 20 percent interest, and at the end of the year you paid the lender a lump sum of $2,400, you would be paying an interest rate of 20 percent, and the APR would be 20 percent too.
However, if you borrowed $2,000 for one year at 20 percent interest, and you paid throughout the year in equal monthly installments of $200 (12 x $200 = $2,400), you are still paying an interest rate of 20 percent, but the APR would be close to 40 percent.
If you simply look at it, the second example may not seem more expensive than the first example but it is. Under the conditions of the first example you had the full amount of the money for the whole year. You could have invested that money and drew interest on it during the year, thus reducing the overall amount of interest loss. In the second example, you did not have the full amount of the money because you were paying it out in installments.
Even loans with a low APR require you to ask a few questions from the lender. You need to know if the interest rate is going to be fixed or if it variable. If the loan’s interest rate is variable your payments will vary as well. If the rate is fixed, your payments will stay the same.
Consumers should also know if there will be any added charges or fees that are not included in the APR. As well, you should inquire about any early payment penalties. Some lenders may levy a fee if the loan is paid off early. By law, lenders must tell you this if you ask them about it.
Learning more about APR and how it affects a loan can save you money on all of your consumer or business loans.