You see "APR" in all the ads for loans. It is on your credit card offers. You may even know the APR for your current loans. But what does it mean?
The Annual Percent Rate (APR) is a good way to compare different loans and their costs. It gives you a fairly level way to compare the percentage costs.
There are so many different numbers that come into play when borrowing money. It can be confusing to tell the differences between different loans. Under the Truth in Lending Act, lenders must quote the APR of a loan to potential borrowers. This helps the borrower understand the associated costs of the loan.
The loan is a percentage that tells you how much you will pay annually to borrow money. For example, if you have a 10% APR, you will pay $ 10 for every $ 100 you borrow annually. When all other terms are equal, you want to look for the loan with the lowest APR.
However, it is seldom that all things are created equal. APR often includes more than just the interest cost of a loan. For example, a mortgage APR could include Private Mortgage Insurance, processing fees and points. There are many other fees and charges that can be included. On the other hand, lenders may leave these items out of the APR in order to show a lower rate. Therefore, you need to know exactly what is included in the APR.
You should look at more than just the APR when considering a loan.You need to know what each charge and expense will be in order to know whether or not the loan is appropriate for you.
You should also consider what you will be using the loan for and how long you will need the loan. For example, certain types of mortgages fit borrowers better than others. Some borrowers benefit from Adjustable Interest Rate Mortgages, while others need a fixed rate. Both loan types have different APRs. The lowest APR might not be the best decision.
Let's look at what APR can tell you about a loan.
You borrow $ 100. The lender tells you that you have a 10% interest rate. Sounds good. If at the end of the year, you paid back $ 110, you had a 10% APR.
But, if you repay the loan monthly in equal installments, you will pay around an 18% APR.
There are APR calculators that can help you determine what APR a loan is charging you.
Numbers can be tricky. They can be downright deceiving at times. That is why it is so vital that you sit down and think your borrowing decisions through. Do the math for yourself and make sure that everything adds up appropriately. Compare the loans in different ways. Run online calculators to see the overall interest paid back and other costs. You may be surprised.
The APR is a valuable tool in comparing different loans. But do not stop there. You have to compare all of the costs, fees and terms to determine whether or not a loan is a good deal.