Influence of the Annual Percentage Rate (APR) on Loans


Annual percentage rate (APR) is a measure of the percentage charged on the principal amount of a loan that you are expected to pay in a year. Every loan includes a percentage (interest you must pay) as well as other payments, like upfront and processing fees. The APR covers all these costs and helps give the borrower a better perspective of the overall costs payable each annum. 

Whenever most people take out a loan whether it’s a mortgage or a credit card consolidation loan from a company like Credible, the fact is that they are mostly concerned about the interest rate. It is a common occurrence to hear such people complain about “hidden costs” when the reality of the overall amount payable gets to them. Most of these “hidden costs” are what encompasses the annual percentage rate, hence the need to be aware of this information before deciding to take out a loan. So, you might ask, what does APR tell you about a loan?

Affordability of a Loan

Whenever you are taking out a loan, the payback rate is undoubtedly an essential aspect that you must take into consideration.  You must realize that the interest rate is not telling everything, though, as a typical loan has several additional costs. All these costs are revealed in the APR, enabling you to determine whether the loan is affordable by your standards or not. Whenever you take up a loan with a high APR, you risk overwhelming your budget, which is ultimately detrimental to the ability to pay back.

Note that the affordability of a loan may also vary in regard to the type of APR adopted by a lending company. In most cases, the loan may either have a fixed or variable APR. When the APR is fixed, it does not change throughout the loan repayment period. When variable, the rates vary from time to time in relation to various economic factors such as the Federal Reserve’s rate. With the variable type of APR, you cannot be sure about the overall amount that you will ultimately pay at the end of the year, and the fluctuations will either be favorable or against you.

The decision concerning the type of APR you want depends on two main factors:

First, you must consider the amount of money requested. Whenever you are taking out a hefty loan, there is the need to know exactly how much it will cost you, so that you can make plans and adjustments accordingly. In this case, taking a loan up to $2000 with bad credit with a fixed APR is advisable, as you will be able to prepare for the exact amount payable. In case you take out a big loan with variable APR terms, it is risky as there is a chance that you may end up paying immense additional amounts in the case the rate shifts against you. People taking small loan amounts have more flexibility with their choice, as the interest rate would not result in too much difference of the amount payable.

Second, you must consider your credit score. The credit score is an average obtained from the three major financial institutions that determines a person’s creditworthiness. Timely payment gives you a good rating while defaulting and constantly missing deadlines earns you a lower rating. In the case you have a good score, there is a high likelihood that you will be offered a fixed APR while a poor rating earns you a high-interest variable APR.

Intention and Target Market of the Loaner

The banking and lending business is vast, as hundreds of thousands of people are always seeking loans for various reasons. Since the lenders are in the industry to make money, different categories of APR’s are offered. Two of the most popular categories include:

0% APR

You may have seen multiple adverts of lenders asserting that they are giving out loans at 0% APR. This deal is called teaser since it is designed to grab the interest of potential borrowers and give them the impression that they will pay off the principal sum and nothing more. Therefore, it is almost like the lender has given you free money, and you will incur no additional cost paying it back. 

If this were true, it would go against the central tenet and focus of any company, which is to make profits. Inasmuch as the offer may be true at the beginning, you can be sure that the intention of the lender is to get you through the door, and one way or the other you will pay an additional amount disguised in different ways. For instance, you may be told to pay a one-off registration fee, processing fee, or account opening fee. Somehow, you will pay more, maybe a balance transfer fee or some other cost.

Whenever you see this 0% percent APR in a lending institution, it may mean that the lenders are not straightforward, and there is a possibility of paying more than you anticipated. It is advisable to avoid these types of loans if you can and seek lenders who are more transparent about the interest and payment terms.

Multiple APR’s

Some lenders offer multiple APR’s in relation to the amounts borrowed. In the case the financial institution from which you wish to take out a loan tells you that they operate on multiple APR bases, it means that the percentage will be determined by the amount requested. Often, higher loans attract lower APR’s and vice versa. Usually, the main aim of the lenders is to entice people to borrow more, which is a win for both parties. As the borrower enjoys lower interest, the lender earns more revenue than he would have had there been a request for a lesser amount. When you wish to take out a large loan, it would be prudent to find a lender with favorable multiple APR rates and chose both the loan amount and the APR that will best satisfy your needs.


Evaluating the APR of any loan is undoubtedly one of the ways through which you will not only learn about a loan but will also have sufficient information to make an informed decision. There are many reasons why people take loans, with the majority using the money for various business ventures. When you consider the APR of a loan, not only do you determine its affordability, but you also understand the intention of the lenders. We hope this explanation of APR helps as you look through the different types you will come across and be able to make a decision regarding what you believe is best for you.