APR

Regulation Z, the rule that carries out the Truth in Lending Act, defines the annual percentage rate as a measure of the cost of credit, expressed as a yearly rate. For a credit card or another open-end line, the APR is worked from the periodic rate the lender charges: that rate times the number of periods in a year.

The APR and the interest rate are not always the same figure. On a card, the APR is the periodic rate multiplied out to a year. On a mortgage, the CFPB describes the interest rate as the yearly cost of borrowing without fees, and the APR as a broader measure that also reflects points, mortgage broker fees and other charges paid to get the loan, so one loan can carry two different percentages.

A card's APR is multiplied out, not compounded. If a month's interest is added to the balance and nothing is paid for a year, a 2% monthly rate grows a $5,000 balance to $6,341, 26.8% more, while the APR still reads 24%.

A credit card charges a 2% monthly periodic rate on a $5,000 balance, which Regulation Z has it disclose as a 24% APR. The first month's interest is 2% of $5,000, or $100. A $250 payment covers the $100 and retires $150 of the balance, leaving $4,850. The rate stays fixed, nothing new is charged, and the interest is charged on the month's opening balance before the payment; the figures here are this example's arithmetic.

At a 1% monthly rate, a 12% APR, the same month's interest would be $50, and $200 of the same $250 payment would reach the balance.

Balance

$5,000

Interest, 2% of $5,000

+ $100

Payment

− $250

Balance after one month

$4,850

The APR decides how much of a payment goes to interest before any of it reaches the balance. In the example, a 24% APR takes $100 of a $250 payment and a 12% APR would take $50. With the example's fixed rate and no new charges, the interest falls as the balance does, so an unchanged payment retires a little more principal from one month to the next.

A dollar taken off a balance stops the interest that dollar was accruing: on the $5,000 card above, 2 cents a month.

On the Debt page, a card or loan in the payoff plan, other than a mortgage, shows its balance and its “APR” on one row, with a projected payoff month once the plan reaches payoff for it. Such a debt with no rate on file shows “Add APR” in that column, and its drawer reads “APR not set”; until a rate is entered, the payoff plan pays that debt its minimum and projects no payoff month or interest for it.

Taiga Finance works out a month's interest as the balance times the rate in effect (the promo rate during a promo window, else the APR), divided by 12. On the Debt page, once a debt is tracked there or a mortgage is in the payoff plan, the rail totals it as “Interest this month” beside a “Weighted rate”, the rates in effect weighted by balance, leaving out debts with no rate. Once the plan projects a debt's payoff, its drawer holds a “Payoff schedule” that starts from the first months' interest and ends in the debt’s “Interest left to pay”. A debt added with “Has promotional APR” checked and a “Promo ends” month runs at its promo rate until the promo ends and at its APR after that, in the drawer's schedule and in the payoff planner alike.