Have you ever loaned someone money? Did the person
pay you back in a reasonable amount of time? If not, would you be
willing to loan that person money again? These are the questions
creditors ask every time you apply for a loan or a credit card.
Credit is extended several ways, including credit
cards, personal loans, car loans and home mortgages. The terms of
your debt repayment include interest. The interest on credit is
usually expressed as an annual percentage rate (APR).
The APR usually appears in the credit terms on the credit application
and takes into consideration how long it will take you to pay back
the loan. This rate can range from a few percentage points to well
over 20%. The lower the interest rate, the less money you will spend
repaying your debt.
APR and Monthly Payments
It's important to understand the difference between the APR and your monthly payment. Your monthly payment is composed of two things:
1. A portion of the original amount of the loan.
In other words, your monthly payment might be reasonable,
but if the APR is very high, it will cost you more and take you
longer to pay off the debt. Most loans are structured so that you
pay off the interest first, then you pay off the principal or original
debt. So, when the APR is high, your interest rate is likely to
be high and there may be extra fees, all of which means you spend
more time and more money paying off the debt. When
comparing loans, be sure to look at the APR. The lower the rate,
By visiting Allie Mae you have taken your first step toward becoming an educated borrower. Allie Mae is an objective, independent source of information for the mortgage consumer. Whether you are buying a home, refinancing, taking a home equity loan, building a home or in need of a mortgage for any purpose, Allie Mae is here to help. Allie Mae has helped thousands of people with their mortgage needs. We have a complete selection of articles, charts, calculators, and checklists designed to help you through the mortgage and home buying process.