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Information and description:
Annual Percentage Rate (APR) is an expression of the effective interest rate that will be paid on a loan, taking into account one-time fees and standardizing the way this rate is expressed. The APR is likely to differ from the "note rate" or "headline rate" advertised by the lender. The aim of using APR is to calculate a total cost of borrowing which allows easy comparison between loans and lenders.
While there are several acceptable ways to calculate the exact APR, the general process is:
• Total the included one-time costs and add them to the face amount on the loan
• Calculate a monthly payment for that amount at the loan's "note rate"
• Calculate what interest rate would have to be applied to just the face amount of the loan in order to equal the calculated monthly payment in step 2.
APR's successes
Other costs
In a simplified example, if you borrow $100 for one year at 5% interest (so that you will owe $105 at the end of the year) and you pay the lender a $5 origination fee, your total cost to borrow the money will be $10 ($5 in a year for interest plus $5 now for the origination fee). Your APR anual percntage will come out at just less than 10%.
Comparison
APR is intended to make it easier to compare lenders and loan options. In the US and the UK, lenders are required to disclose the APR before the loan (or credit application) is finalized.
Rate format
An effective annual interest rate of 10% can also be expressed in several ways:
0.7974% effective monthly interest rate
9.569% annual percnetage interest rate compounded monthly
9.091% annual rate in advance.
These rates are all equivalent, but to a consumer who is not trained in the mathematics of finance, this can be confusing. APR helps to standardize how interest rates are compared, so that a 10% loan is not made to look cheaper by calling it a loan at "9.1% annually in advance".
APR cannot represent the total cost of borrowing:
Some classes of fees are deliberately not included in the calculation. Because these fees are not included, some consumer advocates claim that the APR does not represent the total cost of borrowing. Excluded fees may include:
• routine one-time fees which are paid to someone other than the lender (such as a real estate attorney's fee)
• penalties such as late fees or service reinstatement fees without regard for the size of the penalty or the likelihood that it will be imposed.
Lenders argue that the real estate attorney's fee is an example of a pass-through cost, not a cost of the lending. In effect, they are arguing that the attorney's fee is a separate transaction and not a cost of lending. This is true if the attorneys fees are the same everywhere, or if the customer is free to select which attorney is used. If the lender insists on using a specific attorney however, then the cost should be looked at as a component of the total cost of doing business with that lender. This area is made more complicated due to the practice of the lender receiving money from the attorney and other agents to be the one used by the lender. Because of this, the government has made all lenders produce an affiliated business disclosure form, which shows the amount paid by the lender to things like appraisal firms and attorneys.
Lenders argue that including late fees and other conditional charges would require them to make assumptions about the consumer's behavior—assumptions which would bias the resulting calculation and create more confusion than clarity.
annaul precentage rates, percentgae
See
also:
• Interest rate
nominal interest rate
Effective annual rate
• Adverse Credit History
• Annual percentage rate
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Credit reference agency
• Credit Score
Fair Credit Reporting Act
Identity theft
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This
article is licensed under the GNU
Free Documentation License.
It uses material from the Wikipedia
article "Annual Percentage Rate".
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