When taking a loan, you must understand the terms used in the loan contract. One such term is the interest rate. This is the number that will be charged to you monthly for using the loan. The interest rate is usually based on your credit history.

If you have a good credit history and are financially stable, you will likely pay a low-interest rate for the loan. However, if you have a bad credit record or are not financially stable, you will likely pay a higher interest rate for the same loan.

Defining APR

The APR stands for Annual Percentage Rate. It’s a mathematical equation that determines how much money will be owed to you over one year if paid each month according to the contract terms stated in the loan agreement. The APR can be misleading as it does not take into consideration whether or not you make all of your payments on time or at all.

For example: If your APR is 12%, and you make only nine payments during this period, then in one year (12 months), you will owe approximately $2,000. This is because $1,200 would have been paid out in interest ($1,200 x 12% = $180 per month) and only $900 would have been paid out as “principal” ($900 x 12% = $120 per month). So in one year (12 months), your total amount owed would be $2,000.

The only way to avoid paying such an astronomical amount is by paying off your entire account balance before its due date each month. If you’re paying a lower interest rate, then it only makes sense to make all of your payments as they are due each month.

Unfortunately, if you miss a payment or two, you will start to accrue fees and penalties, which will be added to the principal balance. So if you miss one payment in a year, your entire account balance will increase by an even greater amount than the interest rate. It’s important to note that the minimum payment is subject to change each month based on changes in the outstanding loan balance.

APR Rates

So, what is a good APR? When comparing different loan programs, it’s important to know the “good” APR. A good APR is the lowest interest rate a lender will give you. This is usually determined by the bank or credit union and ranges from 2% to 12%. However, the experts at SoFi point out that “Lenders will also take into account the current U.S. prime rate, which is used to set rates on consumer loan products.”

The good thing about this is that if another lender offers you a lower rate, it’s likely that your payment will be lower as well. So if you have a 10-year fixed loan with an 8% interest rate and a 7% good APR, your payment would be $165 per month ($8 x 12 = $120 + $7 x 12 = $87). If another lender offers you an 8% interest rate and a 5% good APR, then your payment would only be $130 per month ($8 x 12 = $120 + $5 x 12 = $60). In both cases, your payment would still cover your loan’s full cost.

Bad APRs are any interest rates higher than the “good” APR. For example, if you had an 8% good APR on a 10-year fixed loan but an 11% bad APR on an identical loan (with both loans having the same terms), then your payment would only cover 80% of costs. So, in this case, it may make more sense for you to choose the 10-year fixed loan with its lower monthly payments. 

 

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