Understanding Annual Percentage Rates


Banks lend money to individuals who wish to make purchases that they cannot fully cover with their available finances. This may come in the form of loans or credit cards. Banks do not lend this money for free though; individuals must pay for the money that they borrow.

This usually comes in the form of interest. Many institutions calculate annual interest rates in the form of an annual percentage rate or APR. An APR is the total amount of interest an individual must pay on borrowed money over the course of one year.

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The manner in which an APR is calculated depends on what method a person uses to borrow money. When a person takes out a loan, the interest will depend on the amount of money borrowed, the person's prior credit history, and the terms of the loan. This interest rate will then be used to determine the annual interest the person must pay.

This is not necessarily the case when an individual uses a credit card. A credit card usually has a set APR that is the same for everyone regardless of credit history, the amount borrowed, and the term over which a person plans to pay. Many credit cards waive interest when an individual pays back his or her debts within a set period of time, which is usually around 6 months.

Additionally, there are two types of APRs: nominal APR and effective APR. Nominal APR is the simple interest rate. The effective APR is the sum of the borrowing fee and the compound interest rate.


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