What Is APR?

APR comes right after MAR and right before MAY. It consists of 30 days, and is well-known in Northern Hemisphere folklore and fun rhymes for providing rainfall important to the foliage growth shortly thereafter. Additionally, APR originates from the Roman Calendar, where it was the second month and known as Aprillis. It is commonly thought that…

OMG, stop. You know I’m talking about the term relating to interest.

Yeah, but we hate interest. Everyone does. Except the banks who collect it, we suppose.

Can you please just explain APR?

Fine. But we won’t like it.

Deal.

APR stands for annual percentage rate. Thus, your APR would be the amount of interest accrued on debt held for one year. So if your APR was 10% and you owed $10,000, by the end of the year you would theoretically owe $11,000 assuming you made no payments for that period of time.

Why are APRs all so different? How do banks determine your APR?

Your APR is generally a combination of a base rate and the bank’s margin. An example of a base rate may be something like the U.S. Prime Rate based on reporting. The bank’s margin is where most of the rate variation will stem from. Depending on your credit history and your predicted risk, the bank will collect a higher or lower margin on top of the base rate. This is the way the bank manages its risk. If you have a higher chance of defaulting, your loan will be more expensive.

Okay. I think I get it. But how does my APR affect my monthly payment on something like a credit card payment?

Good question. To determine what your monthly payment will be, first you have to determine what your DPR, or daily percentage rate is. To get your DPR, you simply divide your APR by 365. This is how much interest you will owe per day on any outstanding balance. So, in the example above, a 10% APR would have a DPR of just over .027%.

 

Once you have your DPR, you can determine what you owe with a simple formula. First you multiply your DPR by the number of days in your billing period. So let’s pick a random month…I’ll say April.


Shh, I’m working here. So April (or APR, as some call it) has 30 days, which means you multiply .027 by 30. This gives you approximately .82%. Then you multiply that amount by the balance. So .82% times $10,000 gives you $82.19. This means that when you go to pay your $10,000 balance off, you will now owe $10,082.19.

So the bank makes $82 off my debt in 1 month?

Yep. That’s why keeping your balance low is very important. And 10% isn’t even a bad interest rate. Some rates can be 3x that, and rates are also subject to change.

Hey, but if I do this math 12 times, I get more than 10%. What gives?

True. This is just the way of the world. Actually, it’s just called compounding. That is the way it works though. So keep those balances down!

Yikes. I better pay off my balance then!

Good idea. But chin up. If you keep your balance low, your APR showers might bring MAY flowers.