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The term APR is used commonly to describe interest rates associated with credit cards, loans and other financial instruments; APR stands for "Annual Percentage Rate," which is the cost of a debt expressed as an annualized rate.
Function
The APR of a credit card are the costs that would be paid on a balance after after one year; for instance, if you had a balance of $100 and the APR was 20 percent you would owe $20 after a year due to interest and any other costs included in by the company in their APR. Certain fees may not be included in the APR.
Types
APR can be fixed or variable. Fixed rates are more stable and card holders must be notified if changes are made while variable APRs can change more often based on various factors, such as changes in economy wide-interest rates.
Benefits
APR is used extensively because it states interest rates in a single, easy-to-understand amount.
APY
APY or annual percentage yield is a measure that is similar to APR, but it usually indicates the annual interest earned on an account, such as a savings account or CD taking compounding into account rather than the money owed on a debt.
Considerations
APR is sometimes used to indicate the interest rate on a savings account without taking compounding into account. This usage should not be confused with APR when dealing with debts, such as mortgages or credit cards.
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