APR What is it, and How is it Calculated?

APR what is it - what does it mean?

APR (Annual Percentage Rate) can be explained as the annual rate charged for borrowing, which is expressed in the form of a single percentage number that signifies the actual annual cost of funds over the period of a loan. Fees and additional costs may apply as well. Choose the best credit card at DontSpendMore.com

Basic advantage
Since loans and credit agreements vary in terms of transaction fees, interest rate structures, late penalties and other issues, APR is a form of standardized computation that serves as a bottom line which enables the borrowers to compare the rates of different potential lenders.

In simple words, APR or the annual percentage rate is a way to measure up the cost of a credit card loan. It might not be a perfect measurement, but it definitely provides a nice standard for the comparison of percentage costs on different loans.

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Why APR?
Loans can be a bit confusing for borrowers. To minimize the percentage of doubt and deceit, laws have been approved which demand the lenders to quote APR to potential borrowers. According to the law, all loan issuers and credit card companies are bound to disclose APR to customers to facilitate an understanding of actual rates that are applicable on their agreements.

Credit card companies may advertise rates of interest on monthly basis but are also demanded to clearly state the APR to the client before signing any agreement.

APR What is it’s Limitation

Unfortunately, there are certain limitations of APR. In some cases, APR can include more than the interest costs of a loan. For example, for a mortgage APR includes processing fees, private mortgage insurance and also discount points.
Sometimes other charges or fees may not be included in the given APR quote and sometimes they may be included. So for the evaluation of a loan one needs to look into each and every expense and charge detail related to the loan agreement in order to get a good deal. Relying completely on an APR quote is not enough.

Looking at the Bigger Picture

For making the best decision it is vital to know how long the loan will be used. If the charges are spread over a long period of time the APR charges would look lower. In some cases, types of fees are excluded from the calculation of APRs due to which consumer advocates claim that APR does not cover the total cost of borrowing.

Focusing completely on APR, which can be deceptive at times, is not the ideal way to shop for loans. One should closely observe the lender’s quotes, the rate and closing costs and also look at the costs which are excluded.

There can be fixed APRs and variable APRs. A fixed APR will remain the same throughout the period of the loan whereas a variable APR can change any time because it is based on another type of interest rate, such as prime rate.
Conclusion

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