What Is APR?

APR applies to loans and credit of all types (including personal loans like your adjustable rate mortgage, car loan, and personal credit card accounts), but let’s take a quick look at APR and small-business loans.

Some loan types tend to have lower APRs than others. For example, SBA loan rates tend to be lower than non-SBA loan rates. Likewise, term loans usually have lower APR than lines of credit, which have lower APR than credit cards.

As you shop around for a loan, most lenders will give you a range for their business loan rates, so you can choose whether or not to apply. But you won’t know your actual APR until your loan application is approved.

In fact, several things can affect the APR a lender offers you, including term length (lenders usually offer lower APR on longer loans than short-term loans), your business’s credit history, and your personal credit score.

And again, we highly recommend you take the time to calculate the total cost of your loan rather than relying on APR alone. APR is a useful comparison tool, but it’s not the be-all and end-all.

That’s tough to answer, and we’ve never found any credible stats. While we could make some wild guesses, remember that APR depends on everything from your loan type to your personal credit score. Better to look at the best rate you can get rather than worry about the average.

Well, for starters, you can make your loan application as strong as possible. Lenders usually give a lower interest rate (and therefore lower APR) to businesses with good credit history, high revenue, etc.

But that’s a long-term solution. If you want the best possible rate right now, we recommend using a lending marketplace like Lendio. It lets you compare loan offers from different lenders, so you can see what kinds of APRs are available to you.

Some types of business financing use a set rate (like a factor rate) or fees (like draw fees) instead of an interest rate. Because the interest rate is a fundamental part of APR calculations, and these types of financing don’t have an interest rate, you can’t calculate a true APR on those loans.

Instead, you can calculate “effective” APR, which is another way of showing the cost of a loan. But since these types of loans, like a payday loan or a merchant cash advance (MCA), tend to have really short repayment terms (less than a year), the APR looks ridiculously high—like 150% high.

And sure, MCAs are a pretty expensive way to borrow money, but mostly those high APRs just tell you that you’re paying everything back in a short period of time. (We explain this in more detail in our guide to merchant cash advances.)

In other words, you should be careful when you take out a loan with a high effective APR, but you should also make sure you understand what that effective APR is actually telling you.

Next time someone asks what APR is, you’ll have the answer. More importantly, you’ll have the know-how you need to compare your next credit offer, whether it’s a business loan, credit card, or mortgage loan. And that means you can make wiser decisions when it comes to taking on new debt.

Because while your annual rate won’t tell you everything you need to know as a borrower, it will tell you a lot.

Now that you understand APR, you’re ready to compare the best small-business loans and find the right one for your company.

Disclaimer

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