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What is APR?

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January 25, 2020

APR is a common abbreviation for annual percentage rate, which is the amount of interest accrued on debt held for one year. In other words, your APR is the annual cost of your loan.

For example, if you owed $10,000 and your APR were 10%, by the end of the year you would owe $11,000 (assuming you’d made no other payments during that time period).

Your APR is generally a combination of a base rate and the bank’s margin. It’s worth noting that the bank’s margin is where most of the rate variation stems from. Depending on your credit history and your predicted risk, the bank will collect a higher or lower margin on top of the base rate. Basically, banks manage their risk by charging more for loans that have a higher chance of defaulting.

APR isn’t the same thing as interest rate.

Although many people use the terms interchangeably, your APR and interest rate are not the same thing. Your interest rate is just that – the interest rate charged on your loan – and it doesn’t include any of the other associated fees.

APR, on the other hand, is a combination of your interest rate and the other costs or fees included with your loan.

What does APR include?

Your loan fees are usually included in your APR. While the fees will vary by lender and type of loan, here are some of the most common ones:

Application fee (note that it’s always free to apply through Bankroll)

Underwriting fee

Loan processing fee

Mortgage insurance

Your APR can be fixed or variable.

The terms are pretty self-explanatory: a fixed APR stays the same while a variable APR may change.

A fixed rate is good because you’ll know exactly how much your monthly payments will be. The rate never changes, so your payments are predictable (assuming that you haven’t incurred a late fee or other additional charge).

A variable APR fluctuates with the prime rate. If the prime rate increases, so will your APR – and if it decreases, you get the benefit of a lower APR.

How much does your APR matter?

The higher your credit score, the lower your APR. This is standard practice for financing everything from your auto loan, to your home mortgage, to equipment for your business.

While a few APR points might not seem like much, the numbers add up – getting a slightly lower APR can save you thousands of dollars over the lifetime of your loan. This is one of the primary reasons why it’s important to maintain good credit – both business and personal.

If your credit is lacking, it’s smart to shop around and compare lenders. This way you can choose an option with lower APR, then continue building your business credit so you qualify for better terms in the future.

APR isn’t everything, though. When you choose a lender, you’re basically choosing a partner to help your business thrive. In addition to APR, you should also consider the term, collateral, payment options, penalties, customer support, and reputation. You’re not just looking for APR – you’re looking for the whole package.

There’s also a little thing called DPR.

While it’s important to know what your APR is, it’s also good to identify your DPR (daily percentage rate). To figure out your DPR, simply divide your APR by 365. This is how much interest you’ll owe per day on any outstanding balance. Going back to the example above where your APR is 10%, your DPR would be about .027%.

The final step is to multiply your DPR by the number of days in your billing period. For the sake of conversation, let’s say you wanted to see what your DPR would be in April. There are 30 days in that month, so you’d multiply .027 by 30. This gives you approximately .82%. Multiplying that amount by the balance (82% x $10,000) gives you $82.19. This means that when you go to pay your $10,000 balance off, you will now owe $10,082.19.

If you have any questions regarding APR or interest rates on small business loans, your dedicated loan specialist will be happy to help.

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