What Is an APR? – Credit Card Insider - YouTube

Hi, my name is John Ulzheimer, and I'm a credit expert who

contributes to CreditCardInsider.com.

Today's question is: What is an APR?

So an APR, well APR is an acronym that stands for annual percentage rate.

And an annual percentage rate is a single percentage

that represents the actual yearly cost of servicing

some form of debt, like a credit card,

or an auto loan, a mortgage, student loan, any type of liability

where it's accruing interest is going to have

an APR. And the APR is also supposed to encompass the cost of

fees as well the cost of any interest.

The average interest rates, or the average APR,

is going to vary by loan type, or by liability type. So for example,

in the credit card world, the average APR

is somewhere between 15 and 16 percent for a general use credit card like a Visa,

a MasterCard,

American Express or Discover. For retail store cards, which are cards that are issued

with the branding of one of the stores where you like to shop,

they're going to have much higher APRs. The APRs for those types

cards can run well into the 20 percentage point

range and it's generally one-size-fits-all,

which means that regardless of how good your credit happens to be, you're likely

going to get that type of interest rate. Credit cards have what's referred to as

variable interest rates, or variable APRs, rather than what's referred

to as a fixed APR. A fixed APR means that your interest rate stays the same

over time. Credit cards now have variable APRs, which means that they're tied

to the prime rate, which is referred to as an index.

And every time the prime rate changes, there's a possibility that the

interest rate on your credit card is going to change. Now, the prime rate hasn't changed in

many years. It's still

3.25 percent, but many experts believe that in 2015 it's actually going to go up.

So it's very possible that the APR on your credit cards is also going to go up because

it's likely tied

to the prime rate. Now, interest rates and APRs for

credit card accounts are

only meaningful if you're actually carrying debt on the card

meaning that you revolve, or roll, or carry a balance from one month to the next without paying in

full. At that point you're going to accrue interest

and that's based on the APR. If you pay the balance off in full every single month by the due date,

then really the APR becomes meaningless because you're not paying interest anyway.

APRs on mortgages

today are somewhere between 3.75

and 4.5 percent for people who've got very good credit, but they can

go as high as greater than 6 percent for people who have

poor credit. And the APR for a mortgage loan

is generally calculated based on

your credit reports, your credit scores, and other wealth

metrics like your income, the amount of savings you have in reserves built up,

and also collateral value of the house.

So things that you're not even thinking about when it comes to credit cards are

considered in

mortgage lending because it's a different type of loan. Usually a much higher

dollar loan. For auto loans, interest rates or APRs could be actually

as low as 0%. There are some financing sources, generally referred to

as a captive,

and a captive is the financing arm of the manufacturer, like Ford Motor Credit

or Toyota Motor Credit, or Honda Finance.

Those guys generally finance cars built by their manufacturer.

Because they're the captive auto lender, they're able to offer much more aggressive interest

rates, and in some cases if you got

get enough credit, that interest rate could be as low as 0 percent.

Because they want to move the unit off the lot, get it on the street, so they're actually

willing to let you have

essentially free money in order to sell the car.

They're making margin in the sale the car course, so they have another way to

fall back on revenue,

where most lenders who are lending money for car loans are falling back on

nothing other than just the APR or the interest rate.

APR are set in almost all cases based on credit risk, or the risk of the

lender doing business with you.

So things like your credit scores, and the information on your credit report, and

in the mortgage environment,

wealth metrics and collateral value,

those things are all kind of glommed together and determine the overall risk

of the lender doing business with you. And that's how they're going to determine the APR.

The APR is the way that they can subsidize the risk of doing business with you by making more

money

from the entire group of people who have similar risk profiles.

If you've got really really solid credit, you're going to get a very aggressive

APR.

If you've got mediocre to poor credit, you're going to get a not so aggressive APR.

If you've got bad enough credit, then there isn't a high enough percentage rate that they can charge you to

subsidize the risk of doing business with you. You're just simply too much a hot potato.

If you have any other questions pertaining to credit,

or other financial topics, please submit them to CreditCardInsider.com.

Thanks for watching have a fantastic day.