What in the world does APR mean?

Photo by Melvin Thambi on Unsplash

We always hear bankers quoting rates in APR, but no one ever explains what it is! I realized this a few months ago when I talked to a multi-millionaire business owner about a mortgage refinance.

When my mortgage partner quoted him the rates, he nodded his head and acknowledged everything as if he understood. However, once we finished that part of the meeting and my mortgage partner left, I was chatting with him, and he said:

“Hey John, I don’t want to sound stupid, but what does APR mean? And why is it different from the interest rate?”

If my client, who built a business from scratch that generated several million dollars each year, had no idea what the difference between the interest rate and APR was, what hope does anyone else have to understand the difference?

So, to break down what APR means, I went to my trusty source, Investopedia. According to Investopedia, the definition of APR is: The term “annual percentage rate (APR) refers to the annual rate of interest charged to borrowers and paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction, but it does not take compounding into account. The APR provides consumers with a bottom-line number they can easily compare with rates from other lenders.

That is an excellent definition for someone that is in the financial industry but sounds like a ton of gibberish for a layperson, so let’s simplify it so that the typical person can understand what APR means.

APR means Annual Percentage Rate, which combines your interest rate and the fees that the lender is charging you.

That’s so much easier to understand.

You can see this in video format here:

https://youtu.be/7bkrZXOdk-Q

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