Talked about often in the media, but rarely explained, is the Annual Percentage Rate (APR) of a loan. APR is the total cost of borrowing money, expressed as a percentage of the total owed, applied per year. Let's say you charged $1,000 for merchandise and your APR is 24% (by the way, if it is… PLEASE check out CFCU’s excellent credit card options!). In a year, you'd owe $1,240. That's the $1,000 you owe plus $240 in interest and fees (24% of $1,000).
Most commonly, APR is "compounded" - or applied - monthly. This can make the math a bit trickier. That means you're charged 2% each month. If you owe $1,000 at the end of your monthly statement period, you'd be charged $20 in interest. Your total due would be $1,020. If you made no payment, you'd be charged interest on the new balance, which is now $1,020. Interest and fees for the second month would be $20.40.
That extra $.40 might not seem like much, but it adds up over time. As Albert Einstein once said, the most powerful force in the universe is compound interest. Lowering your APR means your monthly payments and total costs will be lower. In many cases, it also means getting out of debt sooner. Here are two steps you can take to lower the APR on your debt.
1.) Shop around
If you wanted to buy a new blender, you'd do research, find out which one is the best, and then compare prices to make sure you are getting the best price. Most people are willing to invest that much time and energy into a relatively minor household purchase. Frequently, financial tools don't get the same treatment. People sometimes sign up for credit cards to get T-shirts or enter contests.
Think of the APR like the price tag. If you want to put the costs in real terms, take the amount you currently owe and multiply it by the listed APR. That's the cost of the loan. You owe it to yourself to do the homework and find the best deal for your money.
Federal law requires lenders to disclose their APR prior to any agreement. You can take that information with you and compare it to the rates offered by other lenders. Compare the rate you're getting to competitors and make sure you get the best price!
If you've got several high-APR loans, it might be time to investigate consolidation options. Consolidation can take several forms. You can get a debt restructuring loan to bundle all your debt into one monthly payment with an affordable APR. You might also be able to use the equity in your home to pay off your debt. Home loans tend to have the lowest APR because they are secured by the value of your house. You might also be able to take advantage of low introductory APRs on new accounts to pay your balance quickly and avoid the powerful compounding interest.
Be mindful when you consolidate your high-interest debt to avoid repayment conditions or other terms that might hurt you. Many sketchy firms offering consolidation loans have emerged, offering terms that sound too good to be true. Only get consolidation advice from people you trust.
Whether you're struggling under the weight of high-interest loans or are in need of a low interest credit card option, CFCU is happy to help. Call, click, or stop by our offices!