Figuring Out Your APR

We live in a time when borrowing money has become commonplace, and most Americans are going to be making payments towards some kind of loan, whether it is a credit card, mortgage or other kind of loan. However, many people that have opened loans may not fully understand their responsibilities as a borrower or how to check credit scores, and some will end up in debt because they are not able to make their payments effectively. Rather than letting debt take over your financial life, you will want to do your best to understand the terms and conditions of any loans that you accept, and a big part of this process is figuring out and understanding your APR.

What is APR?

APR is an abbreviation for annual percentage rate, and it represents an easy way for borrowers to more effectively understand the terms on their loan. Your APR is going to include the interest rate on the loan, as well as other fees like points on a mortgage and opening and closing costs. The main reason for an APR is to show the borrower the total annual cost of their loan, and to help them understand what kind of financial requirements they will have.

Calculating APR

Luckily, figuring out your APR is rather simple. Most lenders are going to be legally required to provide their borrowers with an APR figure, and you should be able to easily obtain that figure when you open the loan. You can then use your APR to determine the total cost that you will pay for your loan over the entire term of the loan. The following is a basic explanation of the math that you will need to do in order to figure out the total cost of your loan using your APR.

First, you will want to multiply your loan percentage by the amount of the loan. So say for example you have a loan of $50,000 and your APR is 5.5%. You will multiply $50,000 by .055 to get $2750, which would be the amount that you will pay towards your loan on an annual basis. Now, in order to determine the complete cost of the loan, you will want to multiply your annual cost by the term of the loan. So if you have a term of 15 years, you would multiply the $2750 by 15 in order to get $41,250 and then you would add that figure to the principal of the loan for a total amount of $91,250. The borrower in our example would be paying a total of $91,250 for their loan with a 5.5% APR.

Limitations of APR

While APR can help you get a basic idea of the price that you will be paying for your loan, it should not be a figure that you completely rely on to understand your loan. It is important that borrowers research and understand all aspects of their loans before signing. If you struggle to understand the terms or the math of any loans, you may want to solicit the help of a professional financial advisor or other expert that can help you understand what you need to know.

APR is obviously an important and essential part of any loan, and you will want to do some calculations before agreeing to a loan, as figuring out your APR is completely essential. Use the basic tips we have provided to better understand your APR and how it will affect your loan. Armed with this information you stand a better chance of borrowing without problems and avoiding the effects of debt.