What Does Finance Rate APR Mean

By David

If you have been trying to get a loan or credit card, you have probably wondered what does finance rate APR mean? In order to answer that question, we will take a look at what it is and what it does in terms of your loan.

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What is APR?

APR stands for Annual Percentage Rate and understanding it is absolutely vital for answering the question “what does finance rate APR mean?” As you have probably assumed from the name, your APR is the percent rate that you will pay on your loan each year and will play a large part in determining how much you will end up paying back on your loan each month. It is also important to note that your “finance rate” and your “APR” are essentially the same thing so do not allow the different terminology to confuse you.

How is APR determined?

Your APR is determined by a few different factors that will be considered together to determine your rate and help you answer the question “what does finance rate APR mean?”

1)      Credit score – Your credit score is going to play the largest role in determining your APR on your loan. The more credit worthy you are, the higher your score will be, and thus the lower the APR on your loan will be.

2)      How much you are borrowing – The amount you are borrowing will also have a decided impact on your loan. The greater the amount, the higher the risk for the lender and thus the greater the APR.

3)      How long you are borrowing it for – The length of time you are borrowing the money for also has an effect on your APR. The longer you intend to borrow for, the higher the risks to the lender and thus the higher your APR

4)      Special circumstances – Sometimes, other factors will influence your APR like where you live, special offers from the lender, or in the case of a car loan the type of car being purchased. These will vary from situation to situation and have different effects on what your APR will be.

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How is APR calculated?

Since most loans are going to be for more than a single year, your APR will be applied to only one year at a time and will use the balance remaining to be repaid at the start of the year as the amount to determine your interest from. For example, if you got a home loan for $50,000 that you intended to pay off over 10 years with an APR of 5% the interest on the first year would be a total of 50,000*0.05=2,500 or $2,500 for the whole year. This of course would be split up equally over the 12 months of the year and paid along with a chunk of the principle each month. If you wanted to figure out your interest for the second year, you would do the same thing, but with the second years’ starting balance.

Now you know what APR is and how it will affect your next loan.

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