Saturday, March 25, 2017

Fundera Whiteboard Series: What is APR?

APR—you’ll hear this 3 letter acronym many times throughout your life. For example, when you sign up for a credit card, when you buy a house, or when you apply for a small business loan.

But what exactly does APR stand for?

Accidental Press Release? No.
Alaska Public Radio? Not quite.
APR stands for annual percentage rate. And it’s the most important number you’ll hear when applying for a small business loan or any other type of financing product.

Why is APR so important?

While an interest rate can give you a glimpse of what you’ll pay back to a lender, an annual percentage rate (or APR) will shine a light on the full picture.

APR, unlike interest rate, considers additional fees. This includes origination fees and documentation fees that aren’t fully visible in an interest rate. You should always ask for APR because it allows you to compare financing options—apples to apples—not apples to oranges.

Interest rates aren’t standardized for time—they’ll tell you how much you’ll pay in interest on each payment. But different loans can have different payment schedules. APR solves this problem by providing a yearly rate!

Let’s see it in action!

Let’s say you’re quoted an interest rate of 10%. The loan amount is $10,000. The term is 3 years. And there’s a 5% origination fee.

After typing in those inputs to a loan calculator or Excel, you’ll see you have an APR of 13.56%! That’s a lot higher than 10% — and not apparent on first glance.

If the APR is different than the interest rate, you can expect it to be higher than the interest rate—and more telling of the true cost of your loan.

So what is APR?

Something you should always look for when considering any type of financing, from loans to credit cards. Never settle for interest alone.

Still confused? Let us know in the comments. If we answered your question, give us a like, a share, or subscribe to our YouTube channel.

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