Understanding Low APR Loans
As you start the process of shopping for a low APR loans for bad credit no guarantor, it’s easy to become drowned by fast-talking salesmen, countless strings of acronyms and deals that seem too good to be true.
How do you cut through the turmoil and make sense of it all? The key is to calculate the Annual Percentage Rate, or APR, of a deal before you sign the dotted line for a payday loan. At Funding Circle, we believe that transparency builds trust, so we’ve put together a quick tutorial on one of the most frequent and least understood terms in finance: APR.
If you want to compare loan offers side-by-side, you’ll need to pay close attention to three items: the interest rate, the lender’s breakdown of loan fees, and the Annual Percentage Rate (APR).
The most important loan term is the interest rate, which is the rate you’ll be charged for borrowing the money. It’s a single number that does not reflect the lender’s fees or any other costs associated with the loan.
The APR is a broader measure of the cost of borrowing the money, reflecting not only the interest rate you’ll be paying but also some of the other fees you’ll be charged for the loan (more on this later).
What is an Annual Percentage Rate – APR
An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardised computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.
Annual Percentage Rate – APR
By law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed to advertise interest rates on a monthly basis but are also required to clearly state the APR to customers before any agreement is signed. For example, a credit card may charge 1% a month, and its APR is 1% x 12 months, or 12%.
Loans are offered with either fixed or variable APR’s. A fixed APR loan has an interest rate that is guaranteed not to change during the life of the loan or credit facility. A variable APR loan has an interest rate that may change at any time.
How is APR Calculated?
Lenders calculate APR by adding their fees for the loan into the interest rate. This is done by amortising the fees out over the life of the loan as if they were additional payments and then calculating a new rate.
The disclosure of the APR is mandated by the Truth in Lending Act, or TILA, to help you understand the tradeoff you’re making between paying a higher interest rate for the loan and fewer upfront fees, or paying upfront fees such as points, or prepaid interest (one point equals 1 percent of the value of the loan), to secure a lower interest rate.
The APR is most useful for borrowers shopping for a fixed-rate mortgage, doing a cash-out refinance, or a low- or no-cost mortgage who expect to hold the mortgage a long time.
The APR of adjustable-rate loans does not reflect the maximum interest rate of the loan, notes the Consumer Financial Protection Bureau. So be careful when comparing the APR’s of fixed-rate loans with adjustable-rate loans, or among different adjustable-rate loans. The APR is calculated somewhat differently for different loan types, so it’s best to only compare APR’s across similar products.
Why is APR Important?
It’s tempting to simply look at the interest rate when comparing potential loan offers, but it doesn’t give you the full picture.
For example, one loan may have an attractively low-interest rate, but if it is compounded daily or associated with a whole bunch of additional fees it may wind up being much more expensive than you originally thought. Given the amount and term of your loan, APR takes into account all of the costs associated with financing the loan and is the best metric to help you compare “apples-to-apples.”
How do I Lower my APR?
Lowering your APR is pretty intuitive. A low APR generally indicates lower interest rates and fewer associated fees. But you can also lower your APR by extending the term of your loan. Keep in mind, however, that longer loans are often associated with higher interest rates.