Print PageWhat is Annual Percentage Rate (APR)?
First of all, APR stands for Annual Percentage Rate and is the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. Put another way, APR is a measure of how much your credit will cost you expressed as a percentage. It is applied to any credit situation, for example when applying for loans, credit cards, and mortgages. It is calculated according to a formula determined by the government and came about as a result of the federal Consumer Credit Act of 1974 to normalize the way lenders promote and inform a potential borrower of their interest rates. It levels the playing field so that the consumer can compare one loan offer against another, even when rates and applicable fees differ. APRs are a way of helping the consumer determine the best loan.
APRs on Credit Cards
The biggest single selling feature of a credit card offer is usually the APR. Study the offer carefully before choosing a credit card offer. Consider the cost of an annual fee, if there is one, for all card users; $70 a year per couple may not be worth it. Check how long the lowest APR is valid; in many cases, it’s for just a few months and then the APR on outstanding balances skyrockets into double digits. Most APRs are linked to the WSJ Prime Lending Rate, published by the Wall Street Journal. When this rate goes up, credit card rates follow accordingly. Remember, though, that APR only comes into play when there’s a balance. If the bill is paid each month in full and on time, APR does not apply.
APRs on Small Loans
APR isn’t very meaningful when measuring the costs of small loans. The federal government had designed APR to measure the cost of credit but the same measuring device is being applied to cost out home mortgages as for small short-term loans. Consumer installment loans for small amounts can often result in less interest than “interest only” credit card loans. APRs on small loans can be confusing; APRs differing by as much as 15 percent “APR” may result in a monthly difference of only a few dollars. When obtaining loans from small loan companies it is often wise to focus on the reputation of the company in the community, the speed of service and whether or not you can afford the monthly payment.
APRs on Home Loans
One of the most common long-term loans where APR is extremely important is a mortgage. A mortgage includes a Note Rate (the actual rate used to calculate the borrower’s monthly payments) and the APR, which is usually higher than the Note Rate because the APR includes others items and fees associated with obtaining a mortgage, such as origination fees, points, mortgage insurance premiums, inspections, lender fees, and prepaid interest. The higher the loan amount, the less impact additional fees or points will have on the APR. When shopping for a mortgage, however, sometimes a loan with a lower APR is not necessarily a better rate. Determine all the fees involved, which the lender is required to disclose. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
APRs on Auto Loans
APRs on auto loans are significant, as they tend to be for considerable amount of money and are in effect for several years. Differences in APRs on auto loans can result in many thousands of dollars over the life of the loan.
Source: Omni Financial®
