What Is APR?

We’ve all seen it, the big three letter APR phrase when we check out our monthly credit card or loan statement. But how many of us truly understand what it means or how it is calculated? If you don’t, it’s a good idea to grasp the basics as it can help you make the best decisions when it comes to borrowing.

APR is short for Annual Percentage Rate and is one of the primary terms used within the loan industry to refer to interest rates.

The Cost of Doing Business

No matter what type of loan or credit you acquire, it will almost always cost you money. This is how lenders make their profits and why they issue loans in the first place. There are numerous fees and charges and ways that a loan can cost you, but the most common method by which this is calculated and presented is as an interest rate.

To understand this it is also important to understand other loan phrases. The amount you borrow is called the principal. So if you borrowed $1,000 from the bank, the principal amount is $1,000. When you pay back your loan you will be paying back both the principal and any fees and interest on top. This may be in one lump sum (as is the case for payday loans) or in regular installments (most other types of personal and business loan).

Calculating APR

The interest you are charged is calculated as a percentage of the principal. So in very basic terms, if your loan of $100 has a fixed interest rate of 2%, then the total amount of interest you would pay is $2. That’s $2 on top of the principal and £102 altogether.

However not all loans work that way and you may have noticed both an APR and an interest rate listed. For some loans with extra fees or mortgages that have a range of other charges (broker fees, closing costs etc), these are also divided and included in the APR. This is why there is sometimes a difference, with the APR showing as higher than the interest rate.

It is also important to recognize that your APR (remember ‘Annual’ Percentage Rate) is an annual or yearly rate. In other words it’s the interest rate expressed yearly, not necessarily over the full term of the loan.

For example if you had a loan of £2,000 with an APR of 10% over three years, you would expect to have paid £20 in one year (10%), but £60 over the loan’s full three year term. Conversely if you had a payday loan of $300 for two weeks at an APR of 200%, the amount of interest you pay is only £16.67.

Over a year or annually, it would have been $600, but because the loan is only outstanding for two weeks you can take that 600, divide it by 72 weeks in a year and then multiply by the two weeks the loan is outstanding.

Credit cards are much the same. For example you may have an APR 18% and your balance for that month is $500. Thankfully you won’t have to pay $90, because that is the annual rate. That month’s interest would be $7.50, which is $90 divided by 12. In real terms you may also have to pay a portion of the principal and other fees, so the actual amount you pay would likely by higher than $7.50.

Fortunately although APR can be confusing, the Truth In Lending Act requires lenders to fully disclose all rates and fees before a borrower signs any contract. All of this information as it pertains to your own loan will be in your copy of the terms (a small booklet or pdf).

Fixed vs Variable APR

In our examples so far we have used what is known as a fixed APR, meaning the rate never changes over the course of the loan. A variable APR is therefore an interest rate that does fluctuate over the loan term. The variable rate however is not a wild number that changes on a whim or is moved by the lender in spite or to make more money. In the United States It is typically pegged to the prime lending rate (the interbank rate published each month by the Wall Street Journal). This happens to be the rate large banks charge each other for overnight borrowing.

APR is fixed to this because it’s stable but reflective or the wider financial market. For example if you were given a really low interest rate and interest rates in general went up, the lender wouldn’t be doing too well. Likewise if you were given a high interest rate and rates went down, you won’t be effected too much as your rate will come down comparatively.

7 Student Loan Tips

Once financial aid has been awarded to those eligible, colleges and places of higher learning expect students to fund their studies using savings or loans from private lenders. There is no better investment than education, as the higher you progress the higher you are typically able to earn. But that doesn’t mean you should jump at the first student loan that’s offered. Just like any other form of loan there are important things to look out for, so here are 7 tips to help you along the way:

Compare Loans

Whether you shop around downtown, call up the banks or use price comparison tools online, your first step to finding the best student loan is to compare your available options. This is not always easy as due to the variety of student programs and vague minimum and maximum rates advertised, but you will still be in a much better position than having never looked around at all. You should use several metrics to help your comparison and these might include the monthly payment amount, repayment schedule and terms, overall cost for the academic term, minimum and maximum rates, and extra fees.

Don’t Borrow More Thank You Need

This might seem like a no brainer, but just because you require some finance to fund your schooling doesn’t mean the full amount has to be sourced this way. Using some savings as a deposit will reduce the amount you need to borrow and agreeing to pay off some of the loan while still in school can even lock in a better rate.

Use a Cosigner with Good Credit

If you are a young student you are unlikely to have much of a credit history and this lack of data might push the interest rates offered up, because the lender cannot accurately assess your risk. It is common practise and in some cases even required by lenders for students to have a cosigner share legal responsibly for the debt. Commonly this is a parent or family friend. A cosinger is somebody who agrees to pay back the loan if the main borrower fails to do so. Therefore it is an added form of security for the lender. Of course for the cosigner to carry any weight they themselves must have a good credit score and ideally many years of credit history to look back on. Data suggests that up to 90% of undergraduates use a creditworthy cosigner, so you will be at a disadvantage if you don’t.

Applying for Multiple Loans Doesn’t Hurt

Although madly applying for lots of loans and credit cards will have a negative effect on your credit score, the idea that it has a really big impact is a bit of a myth. If you are apply for the same type of product and do so within 30 days it is treated as just one search on your credit report, even if you did 10. So to ensure you stand the best chance of being approved for a student loan you should apply for several and then accept the best from the bunch. This is also a much more efficient process.

Your Repayment Plan Affects Your Interest Rate

Lenders recognize that full time students are focussing on their education not earning money, and their investment is in the student’s future. That’s why they offer many different repayment plans depending on the borrower’s circumstances. The common three options are to defer repayment until after graduation, pay back only the interest while studying, or if the student can afford it begin paying everything back in instalments right away. If you can afford the latter, it will work out better in the long run as you will be offered a lower rate. Even if you agree to pay just a portion of the loan during school you can get a reduction on the rate. Remember, regardless of the rate the longer the debt is outstanding the more you will pay overall as interest will applied for longer. This element of the repayment plan is important to compare between lenders.

Consider Variable Rates

Although the idea of a variable rate can often conjure up images of extreme volatility, the truth is they are usually quite stable and you will always start at a better rate than a fixed loan. Of course, variable rates can and will fluctuate, but this isn’t always in the lender’s favour. In many cases it may be willing to take the risk of a slightly higher rate in the end, if you can make a saving in the long run. At the least it’s worth considering.

They Are Tax Deductible

Families with student loans may deduct the interest they pay each year, up to $2,500, so long as they meet certain criteria. Who said student debt was all bad?

Choosing The Right Payday Firm

At this moment in time, it is well-known that payday loans represent a quick and efficient way to get your hands on some extra cash, considering the fact that millions of people throughout the world have to deal with financial issues on a daily basis.

In the fortunate case that you are employed at a full time job, then chances are that you are eligible for a payday loan, which is great news for all people who are currently dealing with economic hardships. During the last couple of years, the payday loan industry in the U.S. alone, has reached a peak of over $40 billion worth of transactions on a yearly basis. This means that the popularity of such agencies has grown substantially, and that numerous payday loan companies have appeared on the market.

However, choosing the right one for your needs can be quite difficult, especially if you don’t know much about what goes behind the scenes, and how payday loans work in the first place. Based on this, in this particular article, we’ve outlined some of the main aspects that you should keep in mind, whenever you are searching for a payday loan agency.

1. Check their license

At this moment in time, there are numerous unlicensed payday loan agencies operating on the market. While some of these unlicensed companies may practice better interest fees because of their illegal operation, there is absolutely no guarantee that they are honest, and won’t scam you. Additionally, the government will also have no power to protect you, in case you have been the client of an illegal payday loan agency. With this in mind, prior to borrowing money from them, you’ll have to carry out a bit of research, to help determine whether the provider is licensed, and operating legally in your area of jurisdiction. Most payday loans company are more than pleased to show you their proof of licence, in case they’re asked to do so.

2. Keep an eye on interest rates

One of the main aspect that mains payday loan companies a bit more controversial consists of their high interest fees. While it is not uncommon for a person to pay around $15 in interest, for a $100 loan, there are some companies that practice hidden costs, and can cash out more from your account. Based on this, always carefully check the interest fees associated with a payday loan company, prior to submitting your application. Be especially careful with agencies that can offer you cash on the moment, or can instantly transfer the funds to your account, as this makes them subject to higher transaction fees, so you’ll likely be the victim of higher service taxes and interest.

3. Carefully read their terms and conditions

When it comes down to dealing with a payday loan company for the first time, invest your time in reading their terms and conditions. Some payday loans can become due anytime between 14 and 90 days, and the payment period is essential to enabling you to pay back your loan in time. It’s also considered good practice to get a quote from a few agencies, prior to making your decision, so that you’re well-informed on the terms, interest and additional taxes being practiced where you live. If there aren’t many physical agencies around you, don’t be afraid to consult the internet. You’ll quickly find many reputable agencies that can assist you both via the internet, but also via telephone.

Other than following the tips that have been mentioned above, you might also want to ask yourself a couple of questions: does your payday loan agency have the appropriate state license; is your personal information protected by their customer privacy policies; is the provider transparent, and are there any hidden fees; do they have the possibility of giving you the money instantly; do you fully understand the application process that you must follow; do you feel 100% comfortable in their stores, and in taking a loan from them; do they have a good customer support team that clearly answers all the question that you might have; is the agency actively trying to calculate the exact, and final cost of your loan; etc. If the answer is yes to most of these questions, then chances are that you have made the right all, and should go ahead with taking the loan from the agency in question.

Based on everything that has been outlined so far, if you follow these tips, you’ll greatly reduce your chances of being scammed, or being taxed considerably more, thus making the process of getting your payday loan quicker, more efficient and cheaper at the same time, which is great news for anyone dealing with financial issues.