In the world of finance, there are a number of different terms that get bandied about and consumers are just expected to know what they mean. One of these is “PA” or “per annum,” which refers to annual interest rates or payment plans for certain types of loans, savings accounts and credit cards. It is very important to understand exactly how PA applies to different financial terms and conditions because it is a very commonly used calculation. In this article, we will discuss what PA means, why it’s used in finance, and how it relates to other types of rates like APR. We’ll also provide some tips on finding loans and other services with favourable PA ratios so you can start saving money today!
What is the definition of PA in finance?PA stands for “per annum.” It is a term that means “a year” and it appears on many financial documents, including loans, mortgages, credit card terms and conditions, and savings account agreements. PA is important in finance because most people need long-term financial services that span years or even decades.
Why is PA used in finance?PA is often used as a way to quantify and explain how much interest you will need to pay each year for different types of loans or credit cards. For example, you might find that your mortgage agreement states “interest rate of 0.04% per annum.” This means that the bank will charge you 0.04% of the total that you still owe each year just for being their customer. The meaning of “per annum” can also be used to calculate how much interest will accrue over a given period of time that you will then receive. For example, if you have £500 in a savings account with 10% PA interest, then the total in the account at the end of the year would be £550.
What is the difference between PA and APR?PA stands for “per annum” and is used when calculating the total amount of interest that will be charged over a year. APR, on the other hand, stands for “annual percentage rate”. The difference between these two terms may not seem significant, but there are some important distinctions to make when using them to compare different financial services. The major difference between PA and APR lies in how each term calculates their numbers:
- PA calculates the total amount of interest that will be charged over one year.
- APR calculated by dividing the interest rate for one year by 12-months.
What are some examples of PA use?Mortgage repayment terms will usually be calculated in terms of PA. Therefore, the payments are taken out of your bank account each month for a one year period and if you take more than 12 months to pay off the loan then it will be added on to an interest rate charged by the lender. This means that your monthly payment may go up or down depending on how much money you still owe them. A lot of financial service providers use PA because they charge people over a longer period of time until their debt is paid in full. Other types of lenders like payday loan lenders only provide short term loans that you are supposed to pay back quickly. It is usually better for them to charge APR rather than PA, because they don’t hold onto your debt for a long period of time. Credit cards also use PA to calculate how much you have to pay back in the long run, but they usually only charge a small monthly fee, so most of their profits come from charging high interest rates. PA is also used by car dealerships, phone companies, TV providers and other businesses whose services require plans or contracts.
How is PA used in a real world finance equation?An example of an equation using the term “per annum” would be calculating how much money you will need to save each year for retirement: Let’s say that you are 35 years old and you want to retire at 67. You have worked out how much your cost of living will be after retirement and you decide that you will need £1,000,000 to retire comfortably. That means you have 32 years until you retire (67 – 32). You then take your desired amount (£1,000,000) and divide it by the number of years remaining (1,000,000/32 = £31,250). This means that you would need to save £31,250 per annum to reach your pension savings goal if only you are making the savings. You can then use that number to work out how much you will need to earn per annum to be able to put aside that amount of money. For example, let’s say your normal monthly living expenses are £3,000. You can then multiply this number by 12 to get you per annum living expenses: £36,0000. If you then add your pension savings target to your living expenses, you will need to earn at least £67,250 per annum to maintain your current lifestyle and retire at 67 with £1,000,000.
How does PA affect your money?PA can affect your money in both a positive way and a negative way depending on what per annum calculation is being made. If you are looking at terms of a loan for example, and you need to pay 5% interest PA, then it is a number which is going to cost you money. You have borrowed a certain amount from a lender, and they make money from this transaction by charging you 5% each year until you have paid the money back. In the case of a loan, the lower the PA, the better On the other hand, if you are choosing between savings accounts, a 5% PA means that the bank will reward you with 5% of your total amount saved for choosing to keep your money with them. This means that your money will increase each month. In the case of a savings account, the higher the PA, the better.
What factors affect the PA/APR you receive?The PA/APR rates that you are offered are usually based on a few factors such as age, credit rating, income level/disposable income, and the amount of time it will take you to pay back the money. If you have any black spots on your credit score from unpaid bills or some other mishap in your past, this may also affect how much you pay for these services as well. Essentially, the lender will take all of these factors into account to decide what level of risk they are taking by lending you the money, how likely you are to pay it back, and what history you have of paying back similar loans in the past. If they rate you poorly, you will either be offered a very high PA/APR or will be refused altogether. In very simple terms, PA/APR rates fall into these basic categories:
- Young, with a good credit score and high monthly income: PA/APR rates will generally range between 0% – 12%.
- Mature, with average monthly income or higher: PA/APRs are typically somewhere around 13%-20%.
- Older, low disposable income level (less than £20K annually): Rates may go up as much as 30%+. This is largely due to a lower ability to repay loans over time due to lack of money or fewer years of life remaining.
Do credit cards use PA or APR?In general, credit cards use APRs. However, some credit card providers offer PA rates on balance transfers or cash advances that are often lower than the APR. A good APR for a credit card is any rate from zero to 20%. This will depend on the type of interest you are paying. If it’s a cash advance, then the APR should be between 25% and 30%. For other types of purchases your APR can range anywhere from 12% up to 24%, depending on how much risk you want to take with your finances. A low-interest card may have an average APR in the 18%-21% range. Some cards offer no annual fee if you have excellent credit, but those that do charge fees usually cost around £100 per year or less (and sometimes they waive this fee in certain circumstances). It will also vary according to what features and benefits come with the card such as free airport lounges or airline miles.
What is a good APR for a bank account?A good APR for a savings account can range from zero to 12%. This will depend on how much risk you are willing to take with your money. Some savings accounts may even have an average interest of 0% annually. Savings account interest rates are usually linked to the administering country’s national interest rates so they fluctuate with inflation and the general economic health of the country. In the UK, for example, the interest rates on savings accounts in 2007 before the financial crises were 5.55% but in 2020 during the Covid-19 pandemic they reached a historically low 0.64%.
How can you find favourable PA rates and APRs?There are many different ways to find favourable PA rates and APRs. One way is by searching the internet for a specific type of loan, mortgage, savings account or other financial service that you require with an attractive PA and APR. You can also use sites like Bankrate to compare financial products side-by-side including various types of loans, mortgages, savings accounts and credit cards, as well as their associated APRs and PAs. If you already have your own bank account then it might be worth taking advantage of any promotional offers your current bank offers such as discounted investment interests rates. You are more likely to receive a favourable PA/APR offer if you have been a loyal customer for many years because your bank will have confidence that they are not taking a risk by lending you money.
To sum up…When it comes to financial services, always be on the lookout for the best possible terms. PA is similar to APR but there are key differences in the way they are calculated and it is very important that you know about both to make the right decision when it comes to loans, credit cards and bank accounts. Always shop around and pay careful attention to all the terms and conditions of any financial service or arrangement that you are considering. If you don’t understand anything, especially the lines and lines of small print which often appear in financial agreements, speak to your accountant or financial advisor and they will be able to help you get a clearer idea of what is on offer.
Share this story