Blog

Rates, APRs, and Dividends: What They Are & Why They Matter

06.06.19
By: American Heritage

When you’re applying for a loan, shopping for an account, or listening to a finance pro, you’re bound to come across a lot of financial jargon – but rarely a clear explanation of what these terms mean. A solid understanding of key banking concepts like rate, APR, and dividend is crucial to making smart financial decisions and can help put more money in your pocket (and keep it there).

We’re here to help. In addition to explaining these three concepts, we’ll show you what each means to your personal finances – and how to use your newfound knowledge to make better decisions about loans, credit cards, and accounts.

 

Defining Rates, APRs, and Dividends

These terms are fairly straightforward:

  • Rate: In the context of loans, a rate is the cost of borrowing money from a lender. It’s expressed as a percentage of your loan amount and is repaid with your principal (the amount of money you borrow).
  • APR: This stands for Annual Percentage Rate and is the price you pay to borrow money, shown as a yearly percentage. When considering a loan, this is a good way to judge your costs. Depending on how the interest on a loan is calculated by your lender, this figure may be a little higher than the rate.
  • Dividends: These are what your credit union pays you in exchange for the use of the funds you keep in savings, checking, or other deposit accounts (many banks use the term interest, not dividends). The money your account earns is often expressed as an APY (Annual Percentage Yield), which shows how much your money will earn in a year. 

These terms make a real difference in terms of how much of your money you’ll keep vs. spend in loan fees. Comparing and calculating rates, APRs, and dividends on financial products can help you choose a financial partner that charges less and pays you more. As not-for-profit financial institutions, credit unions like American Heritage pass more of their earnings on to members. We do this by offering lower borrowing rates and higher dividends.

With that in mind, let’s look at some examples of how a great APR or higher dividends could make a big difference to your bottom line.

 

Lower Credit Card Rates

Suppose you want a new $1,000 laptop. You’d like to pay with a credit card and repay this amount over 12 months. In your wallet are two cards: One is a low-rate card from your local credit union, and the other a higher-rate card from a typical bank.

Your bank card has an 18% interest rate. To pay the $1,000 balance off in 12 months, you’ll pay $92.00/month. At the end of the year, you will have paid $104 in interest.

If you choose your credit union card, with a rate of 12.9%, you’ll pay the $1,000 balance off in 12 months at $89.00/month. At the end of the year, you will have paid $68.00 in interest.

The $36.00 difference may not seem like a big deal, but imagine this savings spread across all your purchases, year after year. Over time, you could save hundreds or even thousands with a lower-rate card.

Try out our calculator to see how a credit card rate will affect your next big purchase.

 

Lower Auto Loan Rates

As you surf the internet on your new laptop, suppose you find a great deal on a used car and want $8,000 in financing. Your local credit union offers 3.49% APR for 60 months. A dealer offers 4.97% APR for the same term. You’ll end up paying $9,685 to the bank through dealer financing, but $344 less to the credit union.

In 2019 prices (and depending how much you drive), that $344 could keep your gas tank full for at least a couple of months.

Before you make your next purchase, compare rates with our Dealer Financing vs. Credit Union Financing calculator.

 

Higher Savings Rates

When you earn dividends from a credit union, your money is working for you. Imagine that you put $20,000 into a high-yield savings account at your credit union with an Annual Percentage Yield of 2.00%. Using our Savings Builder calculator, let’s compare the dividends (interest) you’ll earn over 3 years.

With your credit union account, in 3 years, your $20,000 becomes $22,102. Among banks, the national average savings account interest rate is 0.1%, so for the purpose of this illustration, we’ll use this rate. If you put your $20,000 into a bank savings account, in 3 years, you will have earned only $60 in interest. You’ll make over $2,000 more with the credit union account. That’s money you could use to pay down debt, go on vacation, or fix your car.

 

Every Dollar Counts

You work hard for your money. You should be able to keep as much of it as you can. A credit union like American Heritage will give you more for your money, so stop in to a branch today. We’ll show you our best savings accounts, loan products, and even more ways to make your money grow.