Credit cards have become a necessity for modern money management because of their flexibility and convenience. However, the APR is an important aspect that has a significant impact on borrowing costs. Both fixed and variable annual percentage rates (APRs) are quite common in credit cards and have their own advantages and disadvantages. So that you might make an informed decision, let’s break it up with the differences.
What is APR?
The APR is an annual cost of borrowing as a percentage, which is a comprehensive figure that depicts the total cost of credit. It indicates the whole cost of the credit you take, consisting of an interest rate as well as any other additional costs. APR helps one compare different financial solutions.
What is a fixed APR?
At a fixed annual percentage rate (APR), time is not influenced by the movement in the overall financial market; the interest rate remains the same.
What is variable APR?
A variable APR moves with every change in the benchmark interest rate, such as with the prime rate. If the benchmark changes, then so will your APR and your payment.
Advantages of variable APR
- Lower starting rates: They tend to have lower introductory rates than fixed APRs, making them cheaper in the short term.
- Potential savings: Your APR may decline with a decline in market interest rates thus lowering your borrowing costs.
- Convenience: Lower total interest payments benefit the borrower who can pay off his loan relatively fast.
Disadvantages of variable APR
- Uncertain payments: It’s quite impossible to budget and prepare when monthly payments are uncertain.
- Risk of rate increases: Your APR and payments will rise if the benchmark rates increase, thereby making borrowing more expensive.
- Volatility: Managing money becomes challenging when interest rates fluctuate rapidly, especially in an unstable economy.
Which is a better variable or fixed APR?
Fixed APR: If you prefer stability and predictable payments, especially for a long-term loan or balance, then you should opt for the fixed annual percentage rate option. If you want to get rid of the hassle of changing rates, then the fixed annual percentage rate is your best choice.
Variable APR: A variable APR allows for lower introductory rates, which may appeal to you, but with a level of financial unpredictability. In case you are okay with financial uncertainty and expect the market rate to come down, this is a very good choice to pay back your loan early.
In conclusion, knowing the difference between fixed and variable annual percentage rates is very important to making right decisions about money. Your financial goals, the amount of risk you take, and your attitude to credit management will determine the one you’ll choose for yourself.
(Note: Using a credit card carries its own set of risks)
