Annual Percentage Rate - APR
Anyone with a credit card will know APR well. The figure represents the annual interest rate on a loan, like those on credit card debt.
It is important to note that the figure is annualized, meaning it is figured for an entire year, whether or not the loan lasts for a full 12 months. For a credit card, for instance, you might only carry a balance for a couple months, but when figuring the APR for that period of time, the rate is computed assuming you carried the loan for a full year.
This also comes up with other high-rate items, such as payday loans. For instance, if you borrow $100 from a payday loan outfit (or from Vinnie the Snake down at the OTB) and pay back $110 a month later, the APR for that loan is 120%. For reference, a typical credit card might be in the 20%-25% range.
For that payday/Vinnie the Snake loan, if you had continued to roll over the loan month after month for an entire year, paying $10 a month each month for the privilege, you eventually would have paid back $220 on the $100 loan...or ended up paying $120 to borrow the $100. Thus the 120% APR.
Why is the APR even required? Well, back in the day, there were so many idiots who didn't read the contract, and were charged like $500 a year plus whatever their card was...so that, eventually, the Consumer Protection Agency required the APR designation.
Or said another way, Annual Percentage Rate is just a fancy schmancy number that lets you know how much a lender’s going to charge you to borrow their money. Try repeating it thirty times and keep in mind that humans are a lazy (gasp!) breed, and you’ll understand why some brilliant bloke quickly abbreviated it to APR.
You’ll see APR written as a percentage (like 24%), but hold your horses and don’t confuse it with interest. Because APR is made up of interest rate plus other fees and charges that you a lender tacks on when you borrow from them. (No such thing as a free lunch, friends.)
APRs are Mr. Bossy Pants. Because they basically dictate how much you’ll be charged over the span of a year that you still owe the lender money. Basically, the lender’s giving you a loan but making you pay for it in the form of APR. And, yes, this loan, you’ve gotta pay back, no choice (not like when you borrow money from your BFF and pretend you’ve got selective amnesia when they pester you about it later). But don’t let the word “loan” fool you. Because that term is used loosey-goosey to include many things you probably won’t even think of as a “loan.”
For instance, APRs can sneak up on you (those little weasels, them) in places like credit cards, when you don’t pay your balance in full (and…um…yeah, when you don’t pay your credit card company in full for the stuff you buy, you’re borrowing money, my friend...and borrowing ain’t cheap!). It can also be present in other loan types like personal loans.
But why use APR? Glad you asked. With so many different lenders tacking on different kinds of charges and fees, APRs are a quick easy way to see which lender is offering a better overall rate. So, if Joe Black is offering you a loan for 15% APR but his buddy Ol’ Tommy’s giving you one at 12%, you can quickly see who’s giving you a better deal. Annualizing the rate gives a way to compare different loan options, since each one is reported in the same terms. In the Vinnie the Snake example, $10 might not seem like much, but 120% APR is obviously worse than a credit card (or either Joe Black or Ol' Tommy).
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Finance: What are credit ratings, and ho...40 Views
finance a la shmoop what our credit ratings and how are they interpreted?
well maybe you've heard your parents groan about all of their accumulated
debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]
mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your
dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle
Beach on his visa, and now well your dad might have a nice tan and maybe he's
shaved a few strokes off his game, but you and your sister are eating baked
beans out of the can and taking time to 30-second showers to cut down on you
know gas expenses, so credits evil right? you should only pay for something if
you've got the cash right now in your pocket to pay for it right? well no not
right it's true making purchases on credit and be abused and often is but
building credit ie showing the rest of the world that you can borrow money and
then pay off your purchases responsibly whether you're an individual or a
corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]
complicated world of ours and establishing your own credit rating. so
what really is a credit rating ?well it's a determination of your ability to pay
your debts fully and in a timely manner. all right well there are three major
credit rating agencies who specialize in making these types of evaluations for
the big boys ie large public corporations who borrow money all the
time. the agencies well they're the ones with catchy names like Moody's Standard
& Poor's and Fitch. note that these three are typically used to determine the
reliability of businesses to pay off their debts.
don't confuse credit rating agencies with credit reporting agencies, of which
the major players are Equifax Experian and TransUnion. those guys publish credit
reports assigning credit scores to individuals. so they determine whether
you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]
the keys to a nice new condo or whether you can finally upgrade from your
antique typewriter to Mac. but credit ratings indicate whether
someone might want to trust this or that company to make good on their debts.
check out this table which gives you the rundown of Moody's and SNP ratings right
there. don't worry about Fitch for now they're low man on the totem pole .all
right for Moody's anything rated be a three or better is considered investment
grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]
recommend investing in a company's debt at the top of their class, but for any
failing below this line well they've kind of slapped a junk ish bond label on
it. in other words you know and take your chances. the better the grade the better
a company is done in keeping their books checking their boxes crossing their T's
and dotting your I's and likely it means that they're a low risk. and so
they get cheap interest rate. though the odds are paying back their debts are
high when the risk is low and they're encouraged borrow more money until
they're not a good credit risk. well the ones at the bottom of the barrel are
probably sending weekly emails soliciting funds to you know help [sympathetic woman sits behind a computer]
Nigerian Prince's in distress. so those are credit ratings if you find yourself
in a position to care about them well now you know what they mean and how to
interpret them. as for your personal credit score well just make regular
payments don't spend well beyond your means and refrain from ordering one of
everything off Amazon and you should be just fine. [woman shops from computer]
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