The term fixed APR stands for fixed annual percentage rate. This term essentially means the amount of interest that is going to be charged over the course of a year. A fixed APR is used with many different types of loans as well as with credit cards. When borrowing money, it is important to know whether the APR is fixed or not.
There are two main types of annual percentage rates. A borrower could be charged a fixed APR or a variable APR. A fixed APR provides the borrower with a set amount of interest over the course of a year. For example, if the fixed APR is 5%, the borrower knows that he or she will pay exactly 5% over the next year.
With a variable APR, the interest rate can fluctuate. This means the interest rate is going to be tied to a financial index and it can move up and down depending on conditions in the financial markets. Many times, a variable APR will be tied to the prime rate and have a certain amount of interest added onto it. When working with a variable APR, it can be difficult to determine how much interest will be charged over the course of a year.
A fixed APR can be very desirable when borrowing money. As a borrower, it is going to be much easier to budget loan payments or credit card payments. The borrower knows exactly how much interest is going to be charged and will be presented with a fixed monthly payment. This provides some consistency in the budget of the individual and he or she will not be surprised by any payments.
Another advantage of having a fixed APR is that a borrower will not have to be subjected to market changes. With a variable APR, the borrower is in a position of risk. If market interest rates increase, the payment of the individual could increase substantially. With a fixed interest rate, this is not going to be an issue. The borrower is locked into a particular interest rate over the long term.
When working with credit cards, fixed interest rates will often be offered upfront. If an individual misses a credit card payment, the rate could become a variable rate or could change to a higher fixed rate. This makes it very important to always make credit card payments on time so interest rate changes can be avoided.