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The Annual Percentage Rate or APR is a measure of the true cost of a loan. The Federal Truth in Lending act requires mortgage companies and other lending institutions to provide the consumer with the annual percentage rate so that comparisons between institutions or within an institution can be made.
Unfortunately, there is a lot of confusion over exactly how a consumer should use the annual percentage rate. For example, the APR is not used to calculate a monthly loan payment. A monthly payment is calculated based on the interest rate charged and the term, or length, of a loan.
The annual percentage rate helps the consumer figure out the impact that additional loan fees, such as application fees, have on the total cost of the loan to the consumer. So a simplified formula for APR might be something like:
Annual Percentage Rate = Interest Rate on Loan + Loan Fees
The APR calculation effectively adds the fees to the loan amount, thereby increasing the amount borrowed. A good example is mortgage points. Since the APR accounts for fees, which can vary from loan to loan, it is a good measure of the effective cost to the consumer. The lower the APR, the lower is the cost of the loan to the consumer.
Other forms of this term include -APR |
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