Depending on the loan, two percent APR difference in APR can cost you hundreds of dollars. Don’t believe it? Let’s check it out.
Let’s say you take out a $5,000 loan at 6% APR over 3 years. You’ll pay an additional $475.95 in interest.
Now let’s say you bump that up to just 8%. Now you pay $640.55. That’s an additional $164 on just 2% difference!
Suddenly your loan is costing you thousands of dollars.
That’s why it’s important to know how to calculate APR.
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What Is APR?
APR stands for annual percentage rate, but most of the time it’s compounded monthly.
What happens when interest is compounded monthly? A monthly compounded interest rate means the interest for that month is added to the balance. Then that interest gains interest.
For easy math, if you get a $1,000 installment loan with an 8% APR, you’ll pay $80 interest over a year.
But since the APR is calculated monthly, instead of every year (as annual implies) you pay $83.
The bigger your loan and higher the interest, the bigger that difference is.
APR vs Interest Rate
Interest rate and APR are very similar. They both cover how much you have to pay back throughout the loan.
But they’re not quite the same thing. The interest rate is how much it costs to borrow the initial amount.
The APR includes the interest rate. But it also includes things like set up fees, closing costs (for a mortgage) and other factors.
Since APR includes more factors, you can look at it as a more accurate way to see the big picture costs of your loan.
When you’re getting a bad credit loan, always ask what fees are included in the APR. Lenders are legally required to tell you the APR upfront.
But there are some fees they don’t have to include in your APR factor. These include fees like credit reporting or inspection fees.
Payday Loan APR
Payday loans are called that because they’re designed to get you to your next paycheck. Typically, same day payday loans charge $25 to $50 for every $100 loaned. The idea is you’ll pay back the loan plus the fees in two weeks.
But 1 in 4 Americans takes out a payday loan 9 times or more before finally being able to pay it back.
The average APR is 400%, but it can range as high as 521%.
The initial costs seem low and easy to cover when you’re seeking out the loan. But if you can’t pay it back right away, costs can skyrocket. These fees can quickly add up and overwhelm customers utilizing this solution, as research by the Pew Charitable Trust shows.
Is High APR Good?
It depends on the context. As we’ve discussed, APR covers how much you’ll have to pay to get the money sooner than saving it.
When you’re borrowing money, you want the lowest APR available. It can save you hundreds or even thousands of dollars, depending on the size of the loan.
However, savings accounts pay you APR too. If you’re looking for a good savings account, you want the highest APR you can find. Right now, that’s about 2%.
What Affects Your APR?
So we’ve talked about why low APR is important, but what affects your APR? How can you get a lower rate? Well, there are two primary factors.
The first is the type of guaranteed loan.
Like we talked about, payday loans charge a typical 400% APR. Credit cards charge 15%-30% APR. Personal loans run 14% to 35%.
Online lending runs between 10% and 35%. Mortgages and student loans typically run between 5% and 10%.
The second factor is your credit score. Your credit score ranges from 300 to 850 and anything above 700 is considered a good score.
You can check your credit score through apps like Credit Karma or Credit Sesame. You can also request a free copy of your credit report every 12 months from each of the three major credit bureaus. These are Equifax, Experion, and TransUnion.
There’s a lot that goes into boosting your credit score. These include factors like how much of your credit you use, and how long you’ve had credit. It also considers your repayment history, and how many hard inquiries on your report.
Building up your credit is a long process, but it pays off by giving you lower APR on your loans. Have bad credit and now it? You can learn about your options here.
Here’s How to Calculate APR
Whenever you open up a new credit card, you’ll get a packet of papers that list your APR and any fees. You can usually find the APR on the statement at the end of each period.
But if you want to do the math yourself, here’s how.
First, here are the factors you need to consider.
- The finance charge (a)
- The loan amount (b)
- The loan term length in days (c)
And here’s your formula:
a/b x 365/c x 100 (expressed as a percentage.)
What about payday loans no credit check? They’re a bit different because they like to express their charges as fees, not as interest rates.
To calculate APR for a payday loan you need to know the total amount of the loan, and the fee for each $100 loaned.
Take the total amount and divide it by 100. Then take that and multiply it by the fee. You know have your finance charge and the total loan amount.
You can use the same formula above to calculate the APR for your payday loan.
Here’s everything you need to know about payday loans.
It’s Vital to Understand APR Before You Get a Loan
Now you know how to calculate APR. Next time you get a no credit check loan or open a new credit card, try to get the lowest APR possible. As we’ve discussed, a lower APR can save you hundreds or even thousands of dollars.
Ready to get a new loan or credit card?