## What is APR? An introduction

When looking at a loan or financing agreement, you may ask yourself, “What is the annual percentage rate (APR) and is it an expression of the amount of interest that a loan or other financial agreement will accrue over a one-year period?”

## What is APR? Types and examples of APR

### Nominal versus effective APR

The simplest example of an APR is the nominal annual rate, which is a basic expression of the exact interest rate a loan will accrue on an annual basis. Calculating the nominal APR means multiplying the number of payments a debtor will make in a year by the interest rate.

An alternative framework, the effective annual rate, is a more complicated calculation and varies based on the exact specifications of the loan in question. In general, the effective APR contains a compound interest rate rather than a fixed calculation. The effective APR can vary more than a nominal interest rate calculation due to loan specifics.

Before answering “What is APR?” the specifics of the transaction taking place must be taken into account.

### Transactions with APR

What is the APR in relation to regular purchases? There are a number of financial transactions that would use an annual percentage rate to calculate interest. No matter what the transaction is or how it works, it must involve a long-term exchange of money, like a loan or paying for a big purchase with a loan.

To take an example known to the average consumer, the purchase of a car would be an example of exposure to APR. Since most buyers cannot afford to buy a new car right away, they usually have the option of financing their purchase through the dealer’s financing services or through a third party. Either way, the seller and buyer usually negotiate a mutually agreeable level of interest.

You may have noticed that many car commercials use their APR as a selling point. During the early years of ownership, dealers are willing to offer a lower interest rate to entice potential buyers. Those looking to finance a new car should consider the APR both before and after this “grace period.”

Credit cards also have an APR, but only for those who have a balance. Most credit cards have extremely high interest rates compared to other loans, but they are required to list their interest rates before they can accept a cardholder. Most credit cards’ APRs are based on a monthly payment schedule, which is the standard in the credit card industry.

## What is APR? Answering the question

At this point, you can probably answer the question “What is APR?” pretty easily. Broadly speaking, the annual percentage rate of a loan or other financial transaction describes the amount of interest applied to the outstanding funds during the repayment period. APR considerations are important for a number of different purchases, from car loans and mortgages to credit card balances. Understanding how APR works is a big step when evaluating a major purchase.