Being financially savvy will always have its benefits throughout life. It’ll mean you’ll be able to make sound decisions today for a better financial future. How do you start, you ask? Getting to know terminologies and how things work is always a good starting point.
Everyone knows or understands what interest rates are for loans, but APR is very rarely noticed and even more rarely understood. We look to break APR down for you, so you can really understand it.
1. What is APR?
- APR stands for Annual Percentage Rate.
- "It’s the price of the loan", the real total cost you’re paying to get a loan.
- The calculation is done in a standard way to allow you to compare the cost of products from different banks.
- It includes the interest rate and all the other charges you have to pay to get the loan (like life insurance, files fees, stamps fees, transactional fees, mortgage etc.)
2. What is a good APR?
- You can generally assume that the lower the APR is, the better.
- In order to compare APRs between different loans, you should always check the conditions for which the APR was set (amount, duration of the loan etc.)
- The closer the APR is to the interest rate, the better.
3. APR VS interest rate
The interest rate alone does not give enough information on the cost of the borrowed money. Additional charges might be included in the loan. Another factor is about the nature of the interest rate: whether it’s fixed or variable, and whether it’s flat or degressive… And there’s a huge difference.
4. Fixed vs. variable interest rate
If the interest rate is fixed, it means that it will remain the same during the whole period of the loan.
If the interest rate is variable, it means that it’s indexed or correlated to a certified reference, such as the BRR (Beirut Reference Rate, an indicator released by the Association of Banks in Lebanon), the Libor (London Inter-Bank Offered Rate) etc. It usually changes based on the economic situation and other conditions in the market, and therefore cannot be controlled by the bank.
When the interest rate is variable, it will affect the APR which might result in changes in your payments. It’s important for you to check with the bank if the interest rate you’re paying is fixed or variable.
5. Flat vs. degressive interest rate
Another important point to ask your bank about is if the interest rate is flat or degressive.
A degressive interest rate is calculated every month, only on the remaining amount of the loan.
A flat interest rate is calculated every month, on the initial full amount of the loan, without taking into consideration that monthly payments are gradually decreasing the loan amount. This will automatically mean that your APR will be much higher than the one calculated with a degressive interest rate.
To sum up
The APR is the total cost you are paying to get a loan. It includes the interest you pay and all the other charges. It also includes the impact of the interest rate depending on its nature (variable or fixed, flat or degressive). When you need to compare loans, you should always check the APR, and the conditions in which it was calculated in order to be able to compare correctly.