APR

Definition: The annual percentage rate, or APR, is the interest rate charged on the amount borrowed. It reflects the annual cost of borrowing money. APR makes it easier to compare different loans and credit cards, because you can easily see which loan/credit card would be cheaper. For example, a loan with a 10% interest rate is less expensive than a loan with a 15% interest rate (assuming other things are equal).

Nominal APR vs. Effective APR

There are several classifications of APRs. The nominal APR is the interest rate that's stated on a loan. The effective APR includes fees that have been added to your balance. The effective APR on a credit card or loan might be higher than the nominal APR.

Fixed APR vs. Variable APR

An APR might be fixed or variable. A fixed APR generally remains the same throughout the life of the loan. However, in the case of credit cards a fixed APR can change if the card issuer notifies you 45 days in advance. A variable APR can change without notice and is based on another interest rate, like the prime rate.

Credit Card APRs

A credit card could have several APRs for each type of balance. One for purchases, one for balance transfers, and one for cash advances. The APR for cash advances and balance transfers tends to be higher than the APR for purchases.

The default APR is the highest APR charged by a credit card and usually goes into effect if you default on your credit card terms. This happens when you make a late payment, exceed your credit limit, or the check used to pay your credit card bill is returned.

If you trigger the default APR, your credit card issuer is required to review your account activity after six months and lower your APR if you've made your payments on time.

Also Known As: annual percentage rate, interest rate