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Understanding Your Annual Percentage Rate (APR)

Aug 18, 2007
Annual Percentage Rate (APR) is a standard calculation used by lenders. The APR, which stands for "annual percentage rate", is a good idea badly executed that is as likely to mislead consumers as help them. Sometimes this rate (APR) of a loan needs to be calculated to compare different alternatives. All lenders are required under the Consumer Credit Protection Act to disclose the effective APR as well as the total finance charge in dollars. This 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. The APR is the interest rate that represents the total charge for credit and takes into account the added costs of the loan, such as lender's fees, title fees, loan origination fees; fees that are not included in the actual interest rate. One problem with the Annual Percentage Rate is that nearly every lender out there calculates the percentage differently and may or may not include all their fees.

Where the interest rate tells you how much the money you're borrowing will cost, the APR tells you how much the money and the loan costs. It was intended as a way to enable consumers to be able to shop for a mortgage by comparing the total cost of the loan, rather than just the interest rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay. Because all lenders follow the same rules to ensure the accuracy of the rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.

Years ago, before the APR was required to be disclosed, unscrupulous lenders would promise really low interest rates in order to get consumers in the door. Perhaps the most frequently asked question when signing closing documents revolves around the APR. Disclosure of APR is required by the Truth-in-Lending Law and allows borrowers to compare the actual costs of different mortgage loans. Computing the APR over the full loan term deflates the apparent cost of the loan, making it harder to decide if it truly makes sense to refinance an existing mortgage.

Unfortunately, there is a lot of confusion over exactly how a consumer should use the annual percentage rate. If you know the how much cost of borrowing, there are annual percentage rate mortgage calculators online to help buyers. The annual percentage rate includes only interest and no other costs.
About the Author
Mac Genner is an experienced financial expert and recommends tipsoncards.com for your credit card information needs.
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