What Is a Good APR?

  • By The Able Team
  • Published 11/1/2016

If you’ve ever opened up a credit card account or sought to secure a loan for a car or a house, you’ve likely seen the term “annual percentage rate” (APR). However, you might not truly understand what it means. This term represents your annual interest for the loan or credit card — the current U.S. Prime Rate plus whatever margin the lender charges, in addition to financing fees, equals the APR.

When you seek a loan or open a new credit card account, you look at the APR or interest rate: a lower interest rate means lower payments each month. If you’re currently considering or actively seeking a small business loan, though, you may only be concerned with the amount you might be eligible to receive.

This viewpoint is understandable, but you would be doing yourself a great disservice, and possibly costing yourself extra money unnecessarily, by not examining and comparing the APR among various lenders.

How Do Lenders Calculate APR for Small Business Loans?

A number of factors are taken into consideration for small business loans. Just like with a credit card or mortgage, lenders consider your credit score or the credit rating of your company, which subsequently is one of the determining factors of the riskiness of the loan.

In total, APR is a function of (1) the cost of capital and (2) the riskiness of the loan. Risk is a function of (1) affordability, (2) credit score and (3) collateral/assets.

Actual interest rates for small business loans can sometimes be negotiated, depending upon the allowable spread and whether the loan has a fixed or variable rate. Determining what makes a “good rate” depends upon the riskiness, size and term length of the loan.

Additionally, since small business loans typically have higher interest rates than many other types of loans, the capacity to repay the loan, also referred to as affordability, is especially important. This capacity is based upon your revenue and expenses, as well as how long you’ve been in business and earned a profit. If all of the above factors are favorable, you may receive a “good APR.”

A Breakdown of Good-Bad APR Rates

Super-low risk loans (e.g., vehicle/equipment loans to prime borrowers)

A good APR is in the 2 to 6 percent range.

  • Highly affordable
  • Easy to sell collateral
  • Almost no risk
  • Low foreclosure costs

Low-risk loans (e.g., mortgages to prime borrowers)

A good APR is in the 3 to 7 percent range.

  • Highly affordable
  • Collateral holds its value well
  • Very low risk
  • Moderate foreclosure costs

Medium-risk loans (e.g., fully secured small business loans to prime borrowers or SBA-guaranteed loans)

A good APR is in the 5 to 10 percent range.

  • Affordable
  • Fully collateralized
  • Moderate foreclosure costs

High-risk loans (e.g., under-collateralized small business loans to prime borrowers)

A good APR is in the 7 to 13 percent range.

  • Affordable
  • Under-collateralized
  • Moderate foreclosure costs

Super-high risk loans (e.g., under-collateralized small business loans to sub-prime borrowers)

A good APR is in the 15 to 25 percent range.

  • Affordability is dubious
  • Under-collateralized
  • Moderate foreclosure costs

In the market for a small business loan and want to see what you can get from a company like Able? See what your interest rate is and how much you qualify for (no effect on your credit score).

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