The annual percentage rate (APR) matters when shopping around for cash loans in Provo, Salt Lake City, and other parts of Utah. Utah Money Center explains that this determines the true cost of debt you plan to acquire, allowing you to make an informed decision before you pull the trigger on it.
However, average American borrowers are misunderstanding the APR. Many of them focus solely on the interest rate and loan term since these two factors determine the monthly payment. Without a good working knowledge of the APR, though, you can’t compare financial products effectively.
Today, let’s debunk some of the most persistent misconceptions about the APR:
1. APR and Interest are the Same
They’re closely related, but entirely similar. Both are expressed in a percentage, but the APR is often higher than the interest. The reason is that the former is computed with the latter among other things. The greater the loan amount, the longer the term. The more fees the lender charges, the higher the APR becomes.
2. APRs are Constant
Like interest rates, APRs come in different forms. Some of them are promotional by design to provide discounts during the introductory period of the loan. Non-variable APRs don’t change, while variable ones are not immune to market forces.
The contract usually explains whether your cash loan’s APR is subject to change. Exercise due diligence and read the fine print before you sign.
3. The Math of APRs is Hard
Even if APRs aren’t widely advertised, you can determine what they provide so you know all of the fees you’re obligated to pay. Using Google Spreadsheets, use this formula: (interest rate/months, term’s total number of months, loan value plus other fees). This will determine your monthly payment.
Then, use this formula to compute for the APR: (term’s total number of months, monthly payment expressed as a negative, outstanding loan value). Multiply the product by 12 to derive the annual rate. You’ll have a decimal number, which you can convert into a percentage by multiplying it into 100.
Ignoring the APR is the biggest mistake you could make when taking out any loan. Regardless of the size of the debt you want, look at the big picture instead of concentrating on monthly payments to determine its real affordability.