What Does APR Mean?
If you've ever bought a house or a car, or you've made any type of purchase with a store or credit card, then chances are, you've come across the term APR.
APR is simply an acronym for 'Annual Percentage Rate'. When you're shopping for finance, whether it's for a car loan, mortgage or credit card, the APR is there to guide you during your search for the best loan on the market.
By law, all lenders and banks must provide consumers with data about the terms and costs of a loan, under the 'Truth in Lending Act'. The Acts intention is to aid consumers fairly compare and contrast the variety of loans offered by different financiers, so they are able to make a decision without being deceived or misled.
As simple as it may sound, the APR is actually determined by quite a complex mathematical formula. In a nutshell, it's a measure of the cost of credit, shown as a yearly rate.
The APR reflects the interest rate, the amount of money being financed, the timing of the payments, and any other fees and charges - such as broker charges and administration costs - that are associated with the loan. The APR is there as it would be nearly impossible for consumers to be able to compare all of these costs with multiple lenders on their own.
Due to the APR taking into consideration all of the various fees and charges associated with your loan, it is almost always greater than the actual interest rate attached to the loan.
For example, if you have a fixed rate mortgage, the following could apply:
Initial interest rate: 8%
Loan term: 30 years
Loan amount: 90,000
Total prepaid charges: 2,673
APR: 8.3205%
(Example source: www.charterfinancial.net)
When advertising any form of credit, the law requires that lenders ensure that the APR is shown more prominently than any other rate advertised on the page.
If you have a fixed rate loan, the APR during that fixed period can't change. However, if your loan is attached to a variable rate you have no guarantees that the APR will remain the same during the duration of the loan. This means that if your bank increases its interest rates, the APR on your credit card or home loan will also increase - but if the bank slashes its interest rates, your APR is likely to decrease.
If you're looking for any type of loan, comparing credit card APRs, for example, of the different products available is often the best place to start, but it's important to read the small print and consider all aspects of the loan, rather than simply taking the deal with the lowest APR. Every loan has its own set of conditions, penalties and restrictions, so the cheapest rate may not always be the most suitable product for you and your situation.
APR is simply an acronym for 'Annual Percentage Rate'. When you're shopping for finance, whether it's for a car loan, mortgage or credit card, the APR is there to guide you during your search for the best loan on the market.
By law, all lenders and banks must provide consumers with data about the terms and costs of a loan, under the 'Truth in Lending Act'. The Acts intention is to aid consumers fairly compare and contrast the variety of loans offered by different financiers, so they are able to make a decision without being deceived or misled.
As simple as it may sound, the APR is actually determined by quite a complex mathematical formula. In a nutshell, it's a measure of the cost of credit, shown as a yearly rate.
The APR reflects the interest rate, the amount of money being financed, the timing of the payments, and any other fees and charges - such as broker charges and administration costs - that are associated with the loan. The APR is there as it would be nearly impossible for consumers to be able to compare all of these costs with multiple lenders on their own.
Due to the APR taking into consideration all of the various fees and charges associated with your loan, it is almost always greater than the actual interest rate attached to the loan.
For example, if you have a fixed rate mortgage, the following could apply:
Initial interest rate: 8%
Loan term: 30 years
Loan amount: 90,000
Total prepaid charges: 2,673
APR: 8.3205%
(Example source: www.charterfinancial.net)
When advertising any form of credit, the law requires that lenders ensure that the APR is shown more prominently than any other rate advertised on the page.
If you have a fixed rate loan, the APR during that fixed period can't change. However, if your loan is attached to a variable rate you have no guarantees that the APR will remain the same during the duration of the loan. This means that if your bank increases its interest rates, the APR on your credit card or home loan will also increase - but if the bank slashes its interest rates, your APR is likely to decrease.
If you're looking for any type of loan, comparing credit card APRs, for example, of the different products available is often the best place to start, but it's important to read the small print and consider all aspects of the loan, rather than simply taking the deal with the lowest APR. Every loan has its own set of conditions, penalties and restrictions, so the cheapest rate may not always be the most suitable product for you and your situation.
About the Author:
Peter Carville is a freelance article writer who writes for Financial Facts about the current financial news and the credit crunch.