APR

What is APR?

APR (Annual percentage rate) expresses the total cost of borrowing money for the consumer. It is expressed as a yearly percentage that includes the interest rate charged on the loan or credit and any additional fees or costs associated with the loan: insurance, lender fees, closing costs, etc. APR could give a clear understanding of the true cost of borrowing and make it easier for the 

customer to compare different financial products.

Types of APR

Annual Percentage Rate (APR) can be categorized into two main types: fixed and variable.

Fixed APR

As the name suggests, a fixed APR is a type of interest rate that remains constant throughout the duration or at least for a specified period. However, it is important to note that the fixed rate doesn’t mean that the interest rate will never change, but that the issuer must notify the customer beforehand.

One of the best advantages of fixed APR is its stability and predictability. This could make budgeting easier since you have payment predictability. 

Fixed APRs are commonly found in fixed-rate mortgages, personal loans, and some of the credit cards on the market. However, it is important to notice that a fixed APR might start higher than variable APRs. That means if the rates decrease with time - the customers won’t be able to take advantage of it. Surely, the refinancing options could be an option in that case. 

Variable APR

On the other hand, a variable APR changes over time based on an underlying benchmark interest rate, such as the prime rate. When the market conditions change, so does the variable APR. 

The variable APR more often applies to adjustable-rate mortgages, credit cards, and personal loans. This APR is usually lower than the fixed. However, the trade-off is uncertainty. If the benchmark rate rises, the interest rate on your loan will also increase, leading to higher monthly payments and potentially greater APR.

What to select Fixed or Variable APR?

When deciding between fixed and variable APRs, several factors should be taken into consideration:

For those who prefer stability and can’t afford major changes in the payments, a fixed APR might be more suitable and vice versa.

Market conditions are also important. If the rates are low, locking the fixed rate could be smart. Meanwhile, variable APR could be a choice if the rates are about to decline. 

The duration of the loan is also important. The impact of APR is not as significant for short-term loans, but for long-term loans like mortgages, choosing between fixed and variable APRs can affect one's finances over time.

Those differences are important and could potentially inform smart financial decisions.