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Variable APR -- Understanding the Nuances

APR stands for Annual Percentage Rate. There is a distinction between variable APR and fixed rate APR. Annual Percentage Rate is the overall interest rate on, for example, a credit card; the APR is an amount of interest you will pay over the course of an entire year. For example, you may have an APR of 12.1%, which is the total interest you will be charged for the period of one year. However, the APR is not simply your interest rate. APR is the standard interest rate plus additional fees, assuming that you will keep the credit card, or a loan, for a full year. Choose the best credit card at

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There are various extra costs to be considered with a credit card or a loan, and they each contribute to the APR but not the standard interest rate. Thus, when selecting a credit card, loan or mortgage, the APR should usually be the figure you are interested in rather than the base interest rate.

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It is important to understand the differences between a fixed rate APR and a variable APR. If the bank offers you a fixed rate APR, this means that you can rest assured that the rate of interest and additional fees will not rise or fall significantly without the bank consulting you first with notice. Therefore, you will have a clear idea of the amount of money you will be paying from month to month.

However, a variable APR works differently. A variable APR is an interest rate which is tied to another rate, usually the ‘Prime Rate’. For example, in the US variable APR on credit cards is always tied to the Prime Rate, which is altered by the Federal Reserve. The Prime Rate is the rate which banks charge their most trustworthy customers, which are usually big corporations or conglomerates. Therefore, this rate can change from day to day.

If you are borrowing money, a variable APR may have a lower starting interest rate than a fixed APR. Indeed, this rate can also drop if general interest rates fall. However, due to this variability, the rate can also go up, and it usually does. If the general interest rate does rise, the interest you must pay on your balance with the account will rise too.

This may affect the amount you must pay back as a minimum, making it harder to make payments. Therefore, there are advantages and disadvantages for having either fixed rate or variable APRs, and one should be well versed in each before making a decision.

Something many people do not realise is that there is a baseline interest rate on most variable APR cards, which can nullify much of the perceived benefits of having a variable APR in the first place. Each bank should have the specific details of their variable rate outlined in the cardholder agreement, and these details should be examined thoroughly. When choosing between different types of APR, the differences between fixed rate and variable APR are important to know.

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