APR (Annual Percentage Rate)
What is an Annual Percentage Rate?
APR is calculated by using a standard formula. It shows the cost of a loan of
some kind (e.g. a personal loan), and is expressed as a yearly interest rate.
It includes fees associated with the loan type that it is, such as the
mortgage insurance, the points, as well as the interest rate itself. APR is a
handy thing for those who are shopping around for the right loan. They will
often base their final choice on the one which offers the best annual cost in
comparison to the others. APR considerably bumps up the overall cost of the
loan in which you have to pay back, as it is a consolidation of all the costs,
all inclusive.
The concept of APR is to prevent lenders from advertising a low rate loan
which has significantly high fees. The down side is that all lenders will
calculate their APR differently from others, so there is no way of knowing
exactly what you will and should get. There are no clearly defined rules into
calculating someone's typical APR. Coincidentally, a lower APR does not
therefore mean a better rate. Calculating the APR for a variable rate loan is
even harder, due to the fact that no-one can foresee into the future, so the
rates in which to base it on are unknown.
There are a number of fees which will almost certainly be included in totaling
APR:
APR on loans are something that we must accept as being
slightly controversial, and probably always will be. Costs that will not be
put into the APR are those which can be assumed to be independent to the loan
type itself. The scary thing is, that the majority of the lenders do not know
themselves what their rates are based upon. This is due to the fact that they
use software in order to calculate it, which doesn't actually show exactly
what is being included.
