APR stands for the Annual Percentage Rate on a loan. It is the interest rate calculated not for a single month but the whole year. APR can be of two types, the nominal APR and the effective APR. The nominal APR calculates the simple interest rates for a year while the effective APR is calculated taking into account the fee and the compound interest rate across the year. Parameters like loan due, time period etc are taken in to consideration when calculating the APR percentage.
Benefits of low APR
Low APR stands to be beneficial for the customer, business as well as the economy in general. During a recession, lower APR`s will give support to the starting up of new business ventures. The other benefits can be summarized as follows-
1. Low APR`s save money. When the APR`s are low, customers get more attracted towards loans and might invest in major loans as they can save money by giving less interest.
2. Low APR`s reduce personal debt. When monthly repayments are done against a loan, a lower APR will mean a major part of the loan goes towards the payment of the principal loan amount while the debt keeps on decreasing.
3. It helps to tide over recession period. Whenever a economy gets hit by recession, the finance department of the central government starts to lower the interest rates. This helps in calculating lower APR`s on loan amounts. This attracts customers who can go for bigger investments with lower interest rates and have the chance to “pay less for more”.
4. Low APR`s help in starting up new businesses. Business loans are huge in amount. If the APR is high then so will the annual interest percentage calculated on the loan. This may discourage the young entrepreneur`s to set up their own business. This has an adverse effect on the economy. On the other hand lower APR`s will increase the profit earning capacity of the newer business ventures and build a stronger economy.
5. Low APR`s help in reviving a recessive economy and creates job opportunities with more and more new ventures
In countries like the US and UK, lenders are required to declare their APR rates before a deal on a loan is made. This gives the customers the opportunity to bargain for lower interest rates. A customer also gets the chance to compare the interest rates charged by different companies on a fixed amount. This is a major criterion when selecting a card for credit or applying for major loans.