Annual Percentage Rate: What Is An APR?
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What Is APR Financing?
The Annual Percentage Rate, or APR, is made up of interest charged on the principal borrowed and any fees added for the borrower to get the loan. Loans that have no fees added to the amount borrowed will have an APR that’s the same as the interest rate. As part of the Truth in Lending Act (TILA), lenders must disclose the borrower’s fees when they get a loan. The purpose of the TILA is to protect both consumers and lenders and applies to closed (such as personal loans) and revolving credit products (like credit cards and personal lines of credit). It’s easier for borrowers to comparison shop when they know all the costs of a credit product.
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What is the Annual Percentage Rate (APR) on a personal loan?Loans are sometimes advertised as having both an interest rate and an APR. Many borrowers find this confusing since the rates can be different. Usually, the APR is higher than the interest rate. So, what is an annual percentage rate, and how is it different from an interest rate? The Annual Percentage Rate, or APR, is made up of interest charged on the principal borrowed and any fees added for the borrower to get the loan. Loans that have no fees added to the amount borrowed will have an APR that’s the same as the interest rate. As part of the Truth in Lending Act (TILA), lenders must disclose the borrower’s fees when they get a loan. The purpose of the TILA is to protect both consumers and lenders and applies to closed (such as personal loans) and revolving credit products (like credit cards and personal lines of credit). It’s easier for borrowers to comparison shop when they know all the costs of a credit product.
How do APRs work?The APR considers all the fees you need to pay to get the loan and the interest. Often, lenders add the costs to the loan, so borrowers don’t have to pay them out of pocket. Personal loans and mortgages typically have the most fees associated with them. Some of the fees a borrower might pay for a personal loan are: ● Origination fee: This fee is sometimes called an administration fee, underwriting fee, or processing fee. The origination fee can range from 1%-10% of the loan amount. If, for example, you are borrowing $12,000 and your origination fee is 4%, you will pay an origination fee of $480. Lenders usually deduct the fee from the amount you’re borrowing. In this example, you would have been approved for $12,000 but advanced $11,520. Not all lenders charge all borrowers an origination fee. The borrower’s credit rating, the loan amount, the term of the loan, and whether the borrower needs a co-signer all have an impact on whether an origination fee is charged or not. ● Application fee: Some lenders charge a $25-$50 fee to process a loan application. The fee is to compensate them for their time. ● Interest: In most cases when you borrow money you have to pay interest. While the interest may sound like a small amount per month, it can add up quickly.
Why are APRs important for personal loans?Knowing the APR and not just the interest rate is important for two reasons. The first is to understand how much the loan will cost you. Borrowing money isn’t free, but it’s nice to pay as little as possible. Adding fees to your loan, like the origination fee, will increase your cost of borrowing, making the loan more expensive. Secondly, understanding what an annual percentage rate is important so borrowers can compare products accurately. For example, if two loans have the same interest rate, borrowers might think there’s no difference between the loans. But, if two loans have the same interest rate and one has a higher APR, borrowers will know the loan with the higher APR is more expensive.
What is the difference between APR and personal loan rates?Personal loan rates are the interest rate charged to the loan. For example, if you borrow $10,000 at 9.25%, 9.25% is your loan rate. If you borrow $10,000 at 9.25% and there is an additional $700 in fees added to the loan, you will now pay 9.25% on $10,700. Since the amount owing is higher in the second example, your APR will be higher than the interest rate in the first example.
What factors affect personal loan ratesPersonal loan rates can be affected by several factors. One economic factor that influences personal loan rates is the lending rates set by the federal reserve. Lenders use the federal reserve rates as a base to determine a range on how much interest to charge their customers. Once a base lending rate has been established, lenders use several factors to decide what to charge a borrower. These factors include the amount borrowed and the term. Generally, a loan with a higher amount and longer-term will have a higher rate. Longer-term/higher rate loans increase the lender’s risk. The client’s credit rating has a significant impact on the rate too. If a client has a high credit rating, they should receive better rates than someone with a lower score. For example, Lightstream requires a minimum credit score of 660 and offers a range of interest rates between 4.99%-16.49%. LendingPoint has a minimum credit score of 600, and their rates range from 15.49%-35.49%. Just because you meet their minimum credit score requirement does not mean you will qualify or get the lowest advertised rate. However, if you have excellent credit, you could assume that you should qualify for the lowest advertised rate or a rate very close to it. Rates may also vary depending on the loan amount and term. Collateral and cosigners can also impact personal loan rates. If a loan is secured with collateral, the borrower might get a lower rate because the lender can take the collateral to pay the debt, which reduces their risk. If a borrower takes out a loan with a cosigner, this may also impact the personal loan rate. If a borrower with good credit applies for a loan with a borrower that has excellent credit, they may qualify for a more competitive rate and term. Lastly, debt-to-income ratios can also impact personal loan rates. Borrowers with a higher income, low debt-to-income ratio, and stable employment can be seen as low risk and might get a lower rate.
How do you compare APRs?Borrowers sometimes use the APR to compare loans and mortgages to try and find the best deal. Using the APR as a comparison tool can be helpful if you have all the information. You will need to know what’s included in the APR and what’s not. Assuming the amount borrowed, the interest rate and the term are the same, you’ll still need some additional information to compare the APRs. Get a detailed summary of ALL charges associated with the loan and how you are to pay them. Two lenders might charge the same fees, but one will add them to the loan (increasing the APR) while the other will have the borrower pay some or all of the fees upfront. In each case, you still need to pay the fees. Adding them to the loan might increase the APR (and the payment), but that might be a better choice for you than paying them out of pocket. Lenders often advertise loans with low APRs. Loans with the lowest APRs are typically reserved for borrowers with the highest credit scores, job stability, and a high income. It’s essential to read the fine print and contact the lender to see what you qualify for.
What is the average APR for a personal loan?The average APR for a personal loan can vary from month to month and year to year because the Federal Reserve can change rates. It also varies between lenders. The average APR for a personal loan is influenced by the borrower’s credit score, the amount they borrow, the term they take, and sometimes even where they live. Across all categories, though, the average APR for a personal loan as of October 2021 is 14.47%.
What is a good annual percentage rate for a personal loan?The APR you will have on your loan depends on several factors, as we have seen. Your credit score is definitely one of them. Generally, there’s a range of APRs within a borrower’s credit score ranking. An average is a midpoint between the lowest and highest rate. Excellent-average APR 12.14% Good-average APR 16.14% Fair-average APR 22.02% Bad-average APR 27.70% Depending on the lender, credit score, whether the loan is secured with collateral, the amount, the term, the borrower’s income, debt-to-income ratio, and employment, the APR offered could be lower or higher than the average. Different lenders offer different APRs, so it’s important to shop around.
How do APRs differ from lender to lender?APRs differ from lender to lender because their rates and fees vary. Wanting to know what an annual percentage rate is one way to compare loan offers, as we have seen. At Acorn Finance you can check offers from top national lenders such as some of those listed below to compare APRs and offers. LightStream has a minimum credit score requirement of 660. Their loan rates range from 4.99%-16.49%. Loan amounts vary from 5k-100k with terms of 2-12 years. Lightstream doesn’t charge an origination fee. Upgrade offers loans from 1k-50k with terms of 3-7 years and an origination fee of 2.9%-8%. The minimum credit score required is 560, with rates offered between 6.94%-35.97%. Upgrade offers personal lines of credit too. The minimum credit score required is 560. The APR starts at 6.49% and has a maximum of 29.49%. Limits start at 1k and go as high as 25k. There are no origination fees on a personal line of credit from Upgrade. Prosper requires a minimum credit score of 600. Loan amounts can be between 2k-40k and have an orientation fee that ranges from 2.41-5%. Terms offered are 3 and 5 years with an APR starting at 7.95%-35.99%. BestEgg requires a credit score of at least 600 and can apply for loans from 2k-50k with terms of 3 or 5 years. The origination fee ranges from .99%-6.99%, and the APR can be as low as 5.99%-29.99%. SoFi offers loans from 5k to 100k for borrowers with a minimum credit score of 680. The APR ranges from 5.99-20.94%, with no origination fees. Terms can be as short as two years to as long as seven years. Axos offers APRs from 7.99-35.97% with 0-2% origination fees. Terms are from 1-5 years, and the minimum credit score required is 700. Loan amounts start at 5k and can be as high as 50k. OneMain has a minimum credit score requirement of 600, and loan amounts range from 1.5k-20k. Depending on the State, they charge an origination fee between 1%-10% or a flat fee up to $500. APRs are between 8.98%-36%. Terms are from 3-5 years. One offers personal lines of credit with amounts from $500-$10,000. The APR ranges from 12%-18% with a term of 3 years. There are no origination fees, and the minimum credit score needed is 660. Point Unison Spring Equity offers Home Equity Lines of Credit for borrowers who have a minimum FICO score of 640 and a debt-to -income ratio of 50% or less. Interest rates range from 4.99%-9.50% and APRS are between 4.129% and 9.70%. LendingPoint APRs range from 15.49%-35.49%. The origination fee can be 0%-6%. Amounts can be as low as 2k to 25k with terms between 2-4 years. The minimum credit score required is 600.
How can you make sure you get a good APR on a personal loan?Getting a good APR on a personal loan can take a bit of effort, but it’ll be worth it in the long run. Understanding what is an annual percentage rate is a key to getting the best deal possible. Here are some steps to take to make sure you can get the best value for your circumstances. First, check your credit score. Once you have that, you’ll know the range of rates you can qualify for. If your credit score is low and you don’t need to borrow money immediately, it might help to take some time and work on improving your score. Then, you might qualify for a loan more quickly and get a better rate. Next, get all the information together that a lender might ask for. For example, a lender might ask you to provide proof of income and employment, address verification, a list of assets and liabilities, and proof of identity. Again, be prepared if you need to provide these documents because it will help speed up the process. Once this is done, do some research to see which lenders will lend the amount you need for the term you want. Check to see if they charge fees in addition to the interest on the loan, like an origination fee. Finally, check offers. You may want to see what your local bank can offer. It’s a good idea to always compare offers, even if you have a good and long-standing relationship with your primary bank. Online lenders can offer fast funding and competitive personal loan offers. The best part is, you can complete the entire process from the comfort of your own home. To check offers from top-rated online lenders, visit Acorn Finance.
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