When Does APR Apply?

by Steve Lander
Credit cards can have fixed or variable APRs.

The term APR, or annual percentage rate, seems relatively straightforward. With some loans, it simply refers to the interest rate. However, different types of loans have different interpretations of the APR and of when it should be charged, if at all. With this in mind, it's wise to not just look at an APR, but to also look at what goes into it and how it actually translates to money out of your pocket.

Car and Student Loan APRs

APRs on student loans and APR-based "simple interest" car loans are, indeed, pretty simple. Your APR is the interest rate that you pay on your loan. With a car loan, the APR is almost always fixed, while student loans frequently have variable APRs. Typically, the payments you make are a mixture of interest and principal, with your interest going down every month as you pay off your principal.

Credit Card APRs

Credit cards also have APRs, and the APR interest on them can be either fixed or variable. With a fixed-rate card, you get charged the same interest rate until an event occurs that allows your card issuer to change it. If you have a card with a 10.99 percent APR, for example, it'll stay that way until it can be legally changed for purposes like the expiration of a promotional rate or as a penalty for late payments. Variable-rate cards quote their APRs relative to an index rate. For instance, a variable credit card's APR might be equal to 9.99 percent plus the prime rate. If prime rate is 3.25 percent, the total APR would be 13.24 percent, but if prime goes up to 3.75 percent, the card's APR also would go up -- to 13.74 percent.

Home Loan APRs

Although APRs are just interest rates on most loans, an APR is a shopping tool for a mortgage. For a mortgage, the APR is a tool that expresses both the loan's interest rate and its closing costs as a single number. It lets you see if, for example, a 5.25 percent, $150,000, 30-year fixed loan with no closing costs is a better deal than a 4.75 percent loan with $3,000 in closing costs. However, APRs are limited in that they only compare costs based on the assumption that you pay your mortgage for its entire life, which few people do.

When APRs Get Applied

When an APR gets applied depends on the type of loan you have. Car and student loans calculated using simple interest apply the APR every month, having you pay that month's interest and, usually, a portion of the principal. Mortgages work the same way, but technically only apply their interest rate rather than their APR. Credit cards also apply the APR every month, but you may be able to escape paying interest on your credit card since many of them have a grace period -- if you pay your entire balance before the end of that period, you won't have to pay any interest. Some transactions such as cash advances might not have any grace period, though.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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