While applying for any sort of monetary assistance from financing organizations, you come across a term called APR, which is short for the Annual Percentage Rate. Personal loans, business loans, car loans, property mortgages, and credit cards – all use APRs for the annualized representation of their respective interest rates. As a borrower, you can consider APRs of two loans or two credit cards and compare them based on how expensive the repayments of each would cost.
The APR is calculated by adding the margins charged by the bank/credit card issuer to the annual base rate (prime rate) of the loan/credit balance. Generally, credit card companies and banking organizations offer financial support in two types of APRs – the one with a fixed interest rate, called fixed APR, and the other with a varying interest rate, called variable APR.
Let’s learn more about these two APRs and know the difference between them.
What is a Fixed APR?
A fixed APR is defined as the interest rate on a loan or credit that does not change during its tenure. A fixed APR loan guarantees a flat percentage i.e., a constant annual rate of interest on the loan or the credit facility. A fixed APR does not change even under the most volatile fiscal conditions of the market.
What is a Variable APR?
A variable APR, on the other hand, is defined as the annual rate of interest that changes over time. Most credit cards work with variable APRs. This means that the annual interest rate on a credit card can either go higher or lower than the initial rate. For example, low-interest credit cards come at 7.5% variable APR as they are likely to add around 4.25% interest to the prime rate in the following years.
The Difference Between Fixed APR & Variable APR
The good thing about fixed APRs is that you are always protected from the rising interest rates. Statistically, interest rates of loans and credit facilities have a trend of increasing over the period of time. Variable APRs cannot protect your financial conditions from these potential rate hikes. A fixed APR loan lets you know your exact monthly payment for the entire duration of the loan tenure. With variable APR loans, your monthly payments keep changing and do not stay the same because there is no certainty on whether they would rise or fall. When you apply for loans with a fixed APR, you are clearly informed of the complete borrowing cost, right at the beginning of the loan period. Whereas, with variable APRs, you may end up repaying way more than you borrowed. These loans come with uncertain repayment plans, and most borrowers wind up getting stuck with loans for life.
A fixed APR, however, is not always all that beneficial. The biggest disadvantage of a fixed APR loan is that they start with a high-interest rate, compared to a variable APR loan. Your initial monthly payments are generally higher, and you must pay more upfront. The starting rate of variable APR loans is always low and comparatively much lower than fixed APR loans. Concurrently, a fixed APR does not give the advantage of falling interest rates. With market fluctuations, if the interest rates fall significantly, you would still keep paying at the same fixed rate. Variable APR will not only offer low payments at the start but also provide opportunities for low-interest payments even in the following months, provided that the market interest rates go down.
Fixed APR or Variable APR – Which is Better?
Based on the above comparison, one may ascertain that over time, a fixed APR loan or credit charges a relatively less overall interest, compared to variable APRs. So, it is better to opt for fixed APR instead of variable APR and repay the borrowed money with the least possible interest.
No Comment