Table of Contents
You’ll see APR used in conjunction with several different financial products, including credit cards, loans and hire purchase agreements. But what does it actually mean and how does it work? In this guide, we explain all you need to know.
What Is APR?
APR stands for Annual Percentage Rate, and it’s the official interest rate used for borrowing on a credit-based product, such as loans or credit cards. It takes into account the headline rate of interest you’ll pay, as well as any additional charges or fees.
In other words, it’s a standardised way of showing the cost of borrowing over a year, and is expressed as a percentage.
It’s important to note that the APR will only take compulsory charges into account. This means avoidable fees such as those for late payments or going over your credit limit will not be included.
As the Australian government’s Moneysmart website explains, a rate that includes all fees is known as a comparison rate.
How is APR calculated?
APR is calculated by looking at a range of factors, including:
- The amount being loaned;
- The schedule for loan repayments; and
- Any extra or late payment charges that also need to be added to the loan repayment.
What’s The Difference Between APR And The Interest Rate?
In essence, the interest rate is the extra amount that a financial institution charges a customer to borrow a sum of money. It’s simply the amount charged on the amount you borrow, is expressed as a percentage and is usually (but not always) quoted annually.
The APR is a different figure. It includes the rate of interest, plus any other unavoidable fees associated with the loan, making it a more accurate representation of the total cost of the product.
An APR not only includes the interest that’s incurred on a loan, but it also takes account of all the other fees included in the loan arrangement. These could include set-up fees, ongoing service fees and early repayment fees.
To understand the true monthly rate across a year of the APR, you should divide it by 12.
APRs and 0% credit cards
0% credit cards include promotional offers that provide the holder with a grace period, say, six months where interest is not incurred when the card is used for purchases. The card, however, will still have an APR that gets calculated using the interest rate that the card reverts to at the end of the 0% period.
What’s The Difference Between An APR And Interest Rate?
When a loan or credit card is advertised with a representative APR, the rate must be offered to at least 51% of successful applicants for the product. However, this means that the other 49% may not be eligible for the advertised rate and are likely to pay more.
On the other hand, a personal APR is the rate you’re actually given, and it will be based on your personal circumstances as well as the amount you want to borrow.
Related: Our Pick Of The Best Credit Cards For Australians
What affects your APR?
The APR you’re offered by a lender will depend on your credit score and how well you’ve borrowed in the past. If you’ve always repaid debts on time and haven’t exceeded your credit limit, you’ll be offered a more competitive APR than someone who has regularly missed payments and is therefore seen as a greater risk.
Lenders will also look at your annual salary and household spending before deciding what APR to offer. The amount you want to borrow and the length of time you want to borrow for will also be taken into account.
For personal loans, you’ll usually find that the more you want to borrow and the longer the term, the lower the APR will be. However, you should always ensure you’re only borrowing what you can afford to pay back.
What is a good APR?
The lower the APR the less you will pay in interest and other charges. Many credit cards offer 0% APR on purchases and balance transfers for a set number of months. However, it’s important to check what the APR will revert to after this point as this is the rate you’ll pay if you don’t pay off your balance in full within the 0% period.
While a lower APR is generally better, keep in mind that the APR can vary throughout the year or between offerings from a single product, such as different APRs for transactions and cash advances.
It’s always best to shop around and compare your options carefully before applying for a credit card or personal loan. Many lenders offer eligibility checkers which will give you an indication of how likely you are to be accepted for a particular credit card or loan.
Eligibility checkers run a ‘soft’ search on your credit file, so it won’t leave a mark on your credit file for other lenders to see. If there are a lot of ‘hard’ searches on your credit file in a short space of time, lenders may see this as a sign you’re struggling to get credit.
What’s The Difference Between A Fixed APR And A Variable APR?
A fixed APR won’t change so you’ll know exactly how much you need to pay back.
A variable APR, can change at any point—and usually does in line with the RBA rate rises, as interest rates do.
This means if the cash rate goes up, so will your APR, but if the cash rate goes down, your APR may also follow. Credit cards tend to have variable APRs.
FAQs
What does APR stand for?
APR stands for Annual Percentage Rate.
What is APY?
APY is short for annual percentage yield. It typically applies to money you place in a product such as a savings account and shows you the amount of interest that could be earned in a year. Both APR and APY measure interest; the former relates to interest charged, while the APY looks at interest that’s earned.
How can I lower my APR?
Your APR can be affected by numerous factors, and would usually be lower if you have a good credit history by repaying your debts on time. Lenders will also look at your annual salary and household spending before deciding what APR to offer. The amount you want to borrow and the length of time you want to borrow for will also be taken into account.
What APR should I expect for a credit card?
The APR on credit cards will vary for a wide variety of reasons, as we’ve explained in the article above. However, according to WeMoney, the average credit card APR set by credit card companies in Australia is currently 19.94%.
It is therefore advised to consider an APR that is around this average mark.
Is there an APR when financing a car?
Yes, just like with a personal loan or a credit card, financing a car will also have an APR for you to consider alongside the interest rate on offer.
