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What is APR (Annual Percentage Rate) and how is it calculated

When applying for a personal loan, a credit card or other financing in the United States, you should know a few details to be able to compare how these banking products differ. One such element is the APR or Annual Percentage Rate.

Article content

  1. What is the Annual Percentage Rate (APR)
  2. Calculation of APR
  3. Factors influencing the Annual Percentage Rate
  4. Negotiating the APR

If you want to find out more about its details, we explain the most relevant points for your personal finances.

What is the Annual Percentage Rate (APR)

In Mexico, the US APR is equivalent to the Total Annual Cost (CAT). It is an annualized value that It is used to calculate how much a certain credit card or financing could cost you. The Annual Percentage Rate should not be confused with the Nominal Interest Rate (Nominal Interest Rate, NIR), because they are different concepts that are linked to each other.

It is important to note that:

  • Annual Percentage Rate or Annual Percentage RateAs usual, APR includes all expenses associated with a banking product for one year. This means that it is made up of the NIR, the rates and other charges that the bank has designated for a loan, mortgage, credit card, among others. Depending on the instrument and conditions, the Annual Percentage Rate will not always include all commissions.
  • Instead, the Nominal Interest Rate refers to a percentage calculated per year that is paid in monthly installments on the balance you owe. Unlike the previous concept, it does not include other additional expenses that the banking product could have. It is an indicator that te reveals a part of the total amount to pay, but it is an incomplete picture.

As an additional data, the NIR is always equal to or lower than the Annual Percentage Rate. Sure, this is easy to understand because the second includes the first and other extra charges. Depending on the financial institution or the instrument, this percentage rate can be variable or fixed.

Calculation of APR

Get the bill through the Annual Percentage Rate it is not complicated. It would be enough to know the corresponding percentage and the amount of personal credit. We can exemplify it like this:

  • Suppose you want to order a $ 10,000 loan at 7% APR. Multiplying these values ​​and then dividing by 100, you get $ 700. This last amount is what you have to add to the original amount to know what you are going to pay for each year.
  • There is another way to calculate the APR for credit cards. In this case, you take the annual percentage rate, divide it by the days of the year, and multiply that result by the debt balance. For example, an APR of 27% ÷ 365 days = 0.0739 x $ 3,000, that gives 221.7 interest for each month of billing.

Factors influencing the Annual Percentage Rate

When you apply for a personal loan or other type of financing, you know that banks ask you for several requirements. One of them is the credit score, that the lower it is, the more expensive the percentage that they will apply to you will be.

Even if you have good credit, that doesn’t mean you’re going to get low interest rates, either. Much of it depends on Fed’s economic policies (Federal Reserve), responsible for raising or lowering the official interest rate on the dollar, which is used to take care of the financial system. The value increases to counteract the effects of inflation and decreases to stimulate indebtedness.

As the economy consolidates, the Federal Reserve increases access to loans to control the loss of purchasing power. During the economic crisis of 2008, the official interest rate was almost 0%, which favored asking for any type of financing. Now that the picture is returning to normal, it is more difficult to find such cheap credit.

Negotiating the APR

When we talk about financing, there is always the possibility of obtaining better conditions. Since the Annual Percentage Rate includes various charges, you can negotiate the reduction of the most important. There are 2 main options:

  • Reduce the Nominal Interest Rate (NIR). This strategy could require a refinancing of your debt, which implies having to pay the commissions of the new personal loan again. Still, you should check to see if the APR warrants it.
  • Ask for a reduction if your credit improves. Every time your credit score rises or the Federal Reserve lowers the benchmark, consider requesting a reduction in the Annual Percentage Rate. You can negotiate with the original creditor or find another lender for better terms.

The concept of APR is important for you to take care of your personal finances and know which are the most attractive banking products. If you are looking for the best options, lean on the Business Blog comparator / search engine.

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