What is APR and Why Does it Matter to My Business?

What is APR and Why Does it Matter to My Business?

What Is APR? 

APR, or annual percentage rate, is the price a lender charges you to borrow money on a yearly basis. In addition to including the interest rate a lender charges, APR considers certain fees that the lender may charge as well. As a result, APR can give a truer measure of the overall cost of financing than simply looking at the interest rate alone. 

What Is a Good APR for a Credit Card? 

According to the Federal Reserve, the average interest rate on consumer credit cards that incurred interest was 17.14% as of the end of Q2 2019. Therefore, you could argue that a good credit card APR would be anything below that average.

While the numbers released by the Federal Reserve only reflect consumer credit cards, it should be safe to assume the average business credit card APR isn’t wildly different. (Card card issuers, both personal and business, rely heavily on your personal credit score when they set the terms of your account, including APR.)

Keep in mind that every card issuer is different and sets its own pricing and approval criteria. Below is an approximate idea of what APR you might expect, based on the condition of your credit and other factors, like the type of card you want to open. 

APR Ranges: Business and Personal Credit Cards
Condition of Credit APR Range
Fair 21% – 27%
Good 18% – 20%
Excellent 13% – 15% 

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Why APR Might Not Be That Important On a Credit Card

You can typically avoid paying credit card interest all together if you learn the secret about your account grace period (which really isn’t a secret at all). On most credit cards, your card issuer won’t charge you any interest on purchases as long as you pay your full balance by the due date each month, a fact which the CFPB confirms. However, if you think you may carry a balance, even from time to time, aiming for the lowest APR possible on a new credit card account could be a smart money-saving strategy.

What Is a Good APR for a Car? 

The average interest rate on a 60-month auto loan was 5.36% at the end of Q2 2019, per the Federal Reserve. That rate, of course, is for personal auto loans. It doesn’t factor in commercial auto loans or equipment financing agreements which businesses may have place on vehicles. On the business side, the average APR you’ll pay to purchase a company vehicle can vary widely based on the lender you use and the type of financing you ultimately choose. 

As with any form of funding, the condition of your credit is one of the most important elements that will influence your ability to qualify for a car loan and your cost of credit. A lower credit score generally equals a higher interest rate. Yet credit isn’t the only factor that matters when it comes to the cost of financing. Lenders will also consider the type of vehicle (new or used), the length of your loan term, and even where you live when setting your annual rate. 

The chart below may give you an approximate idea of what you might expect to pay for a car loan.

APR Ranges: Personal Auto Loan (60-Month New Car) 
Condition of Credit APR Range
Fair 9% – 11%
Good 6% – 8.2%
Excellent 3% – 4.6%

 

APR Ranges: Commercial Auto Loans
APR Range: 2% – 18% (and up)*

*Lowest rates are often available through credit unions and traditional financial institutions, though online lenders may have competitive loan offers available as well. Regardless of the lender you choose, the best rates are generally reserved for applicants with excellent credit ratings. 

What Is a Good APR for a Mortgage? 

According to myFICO, borrowers with excellent credit may currently be able to qualify for an APR as low as 3.369% on a 30-year fixed mortgage loan. If you’re able to afford a 15-year term, a borrower with excellent credit might be able to negotiate a fixed-rate mortgage APR as low as 2.79%. 

If you’re purchasing a single family home as a rental property; however, the rate you pay might be a little higher. Depending on the lender, mortgage rates might be 0.50% to 0.87% higher on investment properties versus mortgage loans you take out for personal reasons. 

Again, actual interest rates can vary from lender to lender based on many factors. Here’s a look at the APR range you might currently expect to pay for a personal mortgage loan. 

APR Ranges: Personal Mortgage (30-Year Fixed)
Condition of Credit APR Range
Fair 3.9% – 4.9%
Good 3.6% – 3.8%
Excellent As Low As 3.369% 

APR vs Interest Rate? 

There are two types of rates that can help you understand how much you’ll have to pay a lender for financing — APR and interest rate. Both rates are expressed as a percentage, so comparison shopping can become confusing for the average small business owner or consumer. However, APR and interest rate represent two different figures that shouldn’t be compared side by side. 

APR

As mentioned above, the annual percentage rate on a loan or credit card represents a combination of the interest rate plus other costs and fees associated with a particular form of financing. It’s calculated to represent how much you’ll pay to borrow money from a lender over the course of a year. 

Interest Rate

Interest rate, on the other hand, may only tell part of the story when it comes to how much it will cost you to borrow money. Because it doesn’t include other costs, like origination fees or closing costs, it gives you less information about what you’re paying. 

What Is the APR Formula? 

To calculate the APR of a loan that charges fees, you’ll need to gather four pieces of information first:

  • Fees: Any fees charged by the lender (origination fee, closing costs, etc.) 
  • Interest: The total interest charged over the life of the loan
  • Loan Amount: The original amount borrowed
  • Days: The number of days in the loan term

Once you have the three figures you need, you can use the table below to calculate APR: 

APR Formula
Step One Add total interest charged over the life of the loan to any fees charged by the lender. 
Step Two Take that number (interest + fees) and divide it by the original amount borrowed. 
Step Three Divide the new number by the number of days in the loan term. 
Step Four Multiply that number by 365. 
Step Five Multiply by 100 to find the APR of the loan. 

APR Calculator

If the APR formula above seems complicated, the good news is that you can use a free APR calculator online to help you with the math. An APR calculator, like this free tool from Nav, can help you to compare the true cost of financing, fees included. When you use the calculator you can make a genuine side-by-side cost comparison of your funding choices. 

Fixed vs Variable APR

Annual percentage rates come in one of two flavors — fixed or variable. Here’s a quick overview of the differences between the two. 

Fixed APR does not change over the life of a loan. This means that your monthly payment size remains the same until your loan has been repaid in full (though the final payment might be smaller). Fixed APR is commonly associated with loans like mortgages, auto loans, personal loans, bank loans, and term loans from online lenders. 

Variable APR is tied to an index, like the prime rate, and can fluctuate up and down over time. Common types of variable APR financing include credit cards and lines of credit. If you read online or hear on the news that the Federal Reserve is raising or lowering the prime rate, your APR might adjust (assuming your loan or card is tied to it). 

How to Get a Good APR 

The single most actionable way you can try to improve the APR offers you receive from lenders — either for yourself personally or for your business — is to improve your credit. On the personal side, you should focus on improving your credit reports with Equifax, TransUnion, and Experian. On the business side, you’ll want to place your focus on your business credit reports

Beyond your credit scores, anything else you can do to improve your fundability may be helpful as well. For example, as your business grows older, the sheer age of your company may lower your risk profile in the eyes of a lender. As your company becomes more profitable and your annual revenue increases, that may bode well for your company from a fundability standpoint as well. 

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