Are you considering taking out a loan? Then you should know what APR is .
Regardless of whether you are going to apply for a personal loan, a mortgage loan or invest your money in a fixed term, you must know the Annual Equivalent Rate .
This index since 1990 must be compulsorily included, in accordance with standard 8/1990 instituted by the Bank of United States. Still don't understand what it's about? Do not worry! Next, we will explain you in detail.
What is the Annual Equivalent Rate?
The equivalent annual rate or APR as it is commonly known, calculates the cost or profitability of a banking product . This index is derived from a financial mathematical formula, where different variables are included; such as: the nominal interest rate (TIN) , the term of the operation, commissions and expenses.
It is important to note that APR is an interest rate that you will find in financial savings products; such as: fixed terms, consumer loans, mortgage loans, among others.
Why is the APR rate useful?
This interest rate is useful because it allows the comparison of several products, taking them to the same temporal scenario, taking into account all conditions such as cost or profitability.
In this way, it is easier for example to compare how profitable two deposits with different terms are. This is due to the fact that you can know the performance that each one will have in terms of comparison and deducting possible costs.
Also, with the APR rate you can make comparisons of loans with different periods and different commissions . This is done in order to know if it is more advantageous to choose a short or long term to repay the money.
What are the limitations?
This rate does not circumscribe all expenses. In the case of the costs of opening a personal loan, it is excluded from the calculation. Therefore, it is advisable to carefully review the terms and conditions of this financing.
Likewise, caution must be exercised with the starting hypothesis, where profits can be recapitalized with the same interest rate. For example, when markets are fluctuating, interest rates can change considerably.
For this reason, it is possible that the final return will fluctuate widely due to the effect of the investment type of interest.
Personal and representative rate
- Personal APR: It is actually awarded in financing. It can be equal to the representative or even higher. This will depend on your eligibility. Usually, private lenders are the ones who decide what rate they will offer you. According to the type of loan and if your financial profile meets the conditions they establish.
- Representative APR: It is limited to a percentage of at least 51% of the people accepted for a loan. In other words, 49% of the individuals admitted to the agreement are not chosen to receive the advertised rate and will have to pay much more.
How do I know if they offer me an advantageous APR?
In the case of loans, when you ask for more money, your equivalent annual rate will be lower. However, in the case of credit cards, the rates generally range from 5% to more than 30%.
It should be noted that the rates are based on rates for making purchases online or in physical stores. If you carry out other transactions such as immediate withdrawals or credits , the fees can be much higher.
In general, credit cards for transfers and 0% balance purchases have that annual percentage for the duration of their promotion term. Usually it can be from 3 to 40 months. If you stick to the terms and make your payments on time and in full, you will be able to keep the offer, otherwise you will lose the promotional rate before it ends.
Now, when it comes to credit cards, take into account that the APR may vary depending on the entity and the financing conditions . For this reason, it is best that you use the loan comparator to select the best option for you.