Have you ever thought about the true cost of items purchased with debts instruments such as credit cards and/or loans? The reality is that most people never give it a single thought. Two things that have the biggest impact on the true costs of these items are interest rates and APR or the annual percentage rate. First let’s define the two terms.
Interest: This is the money paid regularly at a particular rate for the use of money lent or for the delaying of debt repayment. This is usually done monthly.
APR (annual percentage rate): This number expresses the annual rate charged for borrowing or earned through an investment. In other words it is the cost of money annually.
Why it matters
Interest rates and APR will each have a different influence on your associated payments. An interest rate of 8% on $1,000 loan will cost you $80 in interest per year. Interest rates can be fixed or can increase over time. Compare this to the same loan with an APR of 8.25% the loan for the year costs $82.50.
APR takes into account other fees such as underwriting fees, processing and origination for the loan. This typically causes APR to be higher than interest rates due to APR encompassing all costs, not just the cost of borrowing funds. Credit card users who pay bills in full each month pay zero interest! But the APR will still exist. This will include any fees charged for using the card for the year.
So the next time you look at your credit card, car loan or mortgage statement, take some time to analyze not only current interest rates but also your APR to get the true cost of the debt incurred.