Jargon Busters: What is APR and Why Should You Care?
In the world of finance, it’s easy to lose yourself in a sea of acronyms, and it’s also easy to let all the jargon intimidate you. Luckily, many of these acronyms are super easy to clear up. With a little clarifying, you don’t have to be scared of all the terminology. For example, at one point, we’ve all wondered to ourself, “What is APR?” Well, if you’ve got questions, we’ve got answers. Read on to learn more about what the often-referenced “APR” is and how it can impact your small business lending decisions.
What is APR?
First thing’s first, to figure out “What is APR?”, we should start with what exactly the letters A, P, and R stand for. The acronym is short for Annual Percentage Rate. When you go shopping for financing for your small business, you will definitely want to keep track of the APR that a lender quotes to you. That’s because this number holds the answer to one of life’s great questions—What’s it gonna cost me? Well, at least if the “it” in question is money that you’re borrowing, it’ll provide you with some answers to that age-old anxiety.
Simply put, the annual percentage rate on borrowed money is the total price you pay for borrowing money. It includes the annual interest rate plus any automatically included fees. Let’s say you’re quoted an annual interest rate of 15% at two different lenders, but in addition to the interest rate, one lender’s fees amount to an additional 3% and the other lender’s fees amount to 4.5%. Fortunately, a lender can’t just disclose the interest rate. They have to add up all the fees into an APR and share it with you. Otherwise, you’d think both loan products were identical.
Why does APR exist?
That’s why APR exists—it compiles all of the borrowing costs into one number. By doing this, it shows you the difference in the cost of borrowing money from lender to lender. For instance, at the first lender, the combined cost would be 18%, and at the second lender the combined cost would be 19.5%. The more money you borrow, the more that extra 1.5% difference will cost you.
By combining fees and interest, APR helps you make a true comparison between your funding options. And every lender has to disclose their APR before you sign on the dotted line. So, say you receive offers for two loans of equal size and equal term length. Which one are you going to pick? APR makes the answer simple—it will, of course, be the one with the lower APR.
What’s the catch with APR?
Just remember that lenders are competing for your business. Ultimately, they want to make their products as attractive as possible. Because they’re competing for your business, it’s your own job to make sure you’re comparing apples to apples and have all of the information you’ll need to choose the right financing option for you.
Sometimes personal and business credit card companies will raise their interest rates and notify you of what seems like a small monthly increase. However, the problem is that your monthly interest rate is not equal to your APR. Actually, it’s not even close. Plus, with compounding interest added into the mix, calculating your total costs can be a little tricky. Be sure not to confuse these numbers with your APR. If a lender doesn’t automatically provide information on your APR, be sure to ask for more information beyond interest rates. If that still doesn’t work, you can take matters into your own hands. Use an APR calculator to figure it out for yourself.
What else should you look out for?
Additionally, there are a couple more things to keep in mind when it comes to APR:
- For products with variable interest rates, you might be quoted an average APR. Though the average might seem helpful to start out, it’s a lot less useful when you start actually having to pay for the money you borrow. A loan could have a 3% introductory APR that jumps to 5% after two years. What that will cost you in the end depends on how quickly you repay the loan. The average APR will blur this fact. Ultimately, this might make you less likely to hurry up your repayment schedule to avoid the looming 2% APR hike.
- Credit card advertisements can trip you up if you’re not paying close attention. The representative APR, or the APR the card company uses for advertising purposes, is the APR that the card issuer offers to the majority of cardholders. However, if you’re not a “representative” cardholder, your APR will probably be higher. That is, if your financial credentials fall outside of what the card issuer considers to be “representative,” then they’ll offer you an APR that’s different from the one they advertised. Double check that you are in fact what they consider “representative” so that you get the deal you agreed to.
What are your main takeaways for APR?
While the answer to the question “What is APR?”—the total price you pay for borrowing money—is pretty straightforward, how various lenders use it might not be so cut and dry. Whatever form of financing you are looking into for your small business, remember that lenders aim to market their deals as appealing as possible. Now that you have a firm grasp on what APR is exactly, remember to exercise your newfound knowledge and read the fine print when you’re searching for funding for your business.
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from Fundera Ledger https://www.fundera.com/blog/what-is-apr-a-simple-explanation