What Is Variable APR?

When applying for small business loans, it’s important to look at the annual percentage rate (APR) to determine the cost of borrowing and compare loan options. If you’re new to funding, the terms variable APR and fixed APR may be confusing.

In this post, we’re going to help you understand variable APR and compare it with fixed APR to ensure you’re getting the best rates and terms available to you. Keep reading to learn more.

What Is Variable APR?

In your business finance journey, you’ve probably encountered a new term: variable APR.

If your loan or credit card has a variable APR, this means that your interest rate will change over time.

Fluctuations in a variable APR interest rate are based on an interest rate index that’s used as a benchmark for lenders. Most lenders utilize the Wall Street Journal Prime Rate, which uses the base rates on corporate loans posted by at least 70% of the nation’s top 10 banks.

While interest rates are always based on the prime rate, the number of percentage points a lender adds to your rate is based on your risk as a borrower:

• Low-risk borrowers (established businesses with high revenue and solid credit histories) will have fewer percentage points added to the prime rate.
• High-risk borrowers (newly opened businesses with low credit scores and/or revenues) will have more percentage points added to the prime rate, making the cost of the loan more expensive.

Regardless of your borrowing status, a variable APR will result in fluctuations in your APRs based on changes to the interest rate index.

To summarize: If the prime rate increases, so does the APR. If the prime rate drops, so does the APR.

Fixed APR VS Variable APR

Interest rates for financing options with fixed-rate APRs never change.

If your APR is 5%, it will be 5% for the life of the loan. The rate doesn’t change when the prime rate increases or decreases, unlike a variable APR.

There are some circumstances where an APR can change, even if it’s a fixed-rate product.

• Fixed-Rate Credit Cards: If you have a fixed-rate credit card, the APR could change, but it has to remain fixed for at least a full year. If it does change, you’re entitled to a 45-day notice from your lender/issuer before the APR changes.
• Fixed-Rate Loans: If you have a fixed-rate loan, the APR could also change, but the lender has to notify you in writing. Lenders that do this will often offer a grace period to allow you to pay off the debt and close your account/transfer the balance before the new APR terms are applied.

Benefits & Drawbacks Of Fixed APRs

Here’s a breakdown of the pros and cons of fixed APRs.

Benefits & Drawbacks Of Variable APRs

Before getting a loan or credit card with a variable APR, weigh out these pros and cons.

The Bottom Line On Fixed APR VS Variable APR

Regardless of how you feel about variable or fixed APRs, the reality is that you might not have a choice in the matter.

A variable APR might be best for your business for short-term use, while a fixed APR could benefit you in the long run. But these aren’t hard and fast rules.

Long-term business loans like Small Business Administration 7(a) loans have variable interest rates and are some of the most competitively-priced and affordable long-term loan options for small business owners.

No matter what you decide, make sure you keep an eye out for sneaky introductory rates. Credit card issuers are notorious for offering low and attractive APRs for the first 6 to 12 months. The rate will then increase sometimes from a fixed APR to a variable APR after this time.

Read all disclosures and agreements before opening an account to avoid any nasty surprises at the end of the introductory period.

APR is one of the most important things to consider before applying for any kind of business financing, but it’s not the only factor when researching lenders.

Your goal is to get rates and terms that work for you and your business. Shop around, research, and compare your options, starting with the best small business loans.