As a top credit union in Genesee County, TVFCU aims to provide unique benefits for our credit union members consistently. Oftentimes, when looking for products like personal loans, credit cards, auto loans, and mortgages, credit unions can provide better interest rates than big banks and other lenders. If you’re in the market for a vehicle, home, or are just thinking about taking out a loan, you may have seen or heard the term APR.
APR is what’s called Annual Percentage Rate, and that’ll be the topic for today’s blog. Most people have a pretty good understanding of interest rates and how they affect the cost of your loan, but does everyone know what APR is and how it can impact your monthly cost? Let’s break it down!
What’s the Difference Between APR and Interest Rate?
Regardless of whether you’re looking at installment loans like mortgages, personal loans, or auto loans, or if you’re looking at revolving credit, like credit cards and lines of credit, APR will be mentioned, and it’s important to understand what it means. It’s especially important to understand the true APR when reviewing advertisements that talk about promotions on interest rates.
Interest Rate refers to the annual cost of a loan to a borrower, which is expressed as a percentage.
Annual Percentage Rate is the actual annual cost of a loan to a borrower, with all other fees and costs included. It is also expressed as a percentage.
How Does APR Affect Your Loan?
It could be argued that APR is technically a better way of comparing different loan offers than using the interest rate alone because it will provide a clearer and complete picture of your total cost of financing, both at a monthly payment level and over the course of your loan. Let’s take a quick look at a car loan to help demonstrate the impact of APR.
A Higher APR will equate to a higher cost each year. This means APR will show you the percentage of the loan that you pay each year. A higher APR means you will pay more in both interest and in fees over the course of the loan.
Even the smallest difference in APR can impact your monthly payment quite a bit.
Let’s say you are looking at financing a $30,000 loan.
A $30,000 loan with a 4% APR over 60 months is roughly $552 per month.
A $30,000 loan with a 6% APR over 60 months will be roughly $580 per month.
Beyond the monthly payment, examining and understanding a loan’s APR will also help you to better understand the impact of APR on the total cost to repay the loan. If you consider the example above, the difference does add up. The $28 a month may not seem like a huge deal on a month-to-month basis, but when you add it all up over the course of 60 months, you’re looking at an additional $1680 in total payments over 5 years.
What You Need to Keep in Mind Regarding APR
Now that we have a better understanding of what APR is and why you should know about it when negotiating a new loan, let’s take another few notes. How can you maximize your “best” APR to ensure you’re getting the best deal you can?
There are a few factors that determine Annual Percentage Rate.
Some things we can control, and some things we can’t.
For one, market conditions will change interest rates based on things like overall economic health and inflation. Lower growth in the economy can mean lower rates, while a booming economy with rising inflation can increase rates.
Your credit score will certainly have an impact on the APR you will get. A higher credit score means a lower APR in most cases, and the lower your score, the higher your APR will fall, depending on what type of loan you are looking at. The type of loan will also affect the APR, depending on different requirements and risk assessments.
How You Can Get the “Best” APR for You
Well, the first thing you can do to maximize the “best” APR for your loan is to ensure you are paying down your debt, making timely payments, and avoiding too many new credit inquiries. This will help to improve your credit score, which will help your APR significantly.
The other thing you can do is simply shop around to different lenders. This is why it’s so important to consider a credit union for things like an auto loan, because by trusting the dealer (new or used!), you are not providing yourself with multiple options that could result in not only a lower monthly payment, but also a lower total cost over the length of the loan.
Lastly, it’s important to always keep learning when it comes to finances and managing your money. We learn so little in school and even in college regarding managing our money, loans, debt, etc. If you weren’t planning on becoming someone in banking, business, or finance, some of these things you may end up learning the hard way. Be sure to educate your friends, kids, family, and others about these life lessons so we can all be a bit more informed when it comes to money!
Hopefully, today’s blog is helpful for those wondering about APR and what you need to know before taking out a loan. We have recently expanded our field of membership to reach 14 counties in the Greater Niagara, Southern Tier, and Finger Lakes region, and would love to help you with all of your lending needs. If you’re interested in learning more or applying for a loan, check out our website at www.tvfcubatavia.com or give us a call at (800)722-8224 to speak with someone in our branch today!
