What is an APR?

This is the Annual Percentage Rate that is used to express the cost of credit. This is the amount that a customer needs to pay yearly for acquiring credit or loans etc. It is law that the lenders have to disclose the APR to the customer fully. This law is called the Truth-in Lending Act.

This law was originally enacted in 1968 and later in 1980 it was reformed and simplified. The function of APR is that it should be able to tell the consumers which loan is cheaper and which is costlier. This also makes it difficult for the lender to hide fees when they advertise that their loans are at a low rate.

The APR helps the competition in the loan market from not affecting the borrowers and that they should make a well informed decision. As said before that APRs can be helpful in judging the loan costs but at times they can be confusing too. This is because each lender may be calculating APRs in a different way. So a loan having a lower APR may not be infact less costly than a loan with a higher APR.

The lenders are given more flexibility while calculating the APR. This way even without breaking the law they can underestimate the annual percentage rate of a loan by as much as 1/8 of a percentage point. Also for the loans that are other wise considered regular the lenders underestimate the rate even by ¼ of a percentage point.

The concept becomes more confusing because there are various fees that are included in APR. The variation in this fee happens due to different credit products obtained. Points, prepaid interest, fees for loans and private mortgage insurances etc are all charged in APR. Sometimes the fees of the loan application and the credit life insurance costs are also included in this.

To avoid any discrepancies in APR, financial experts advice that it should be calculated on your own. This can be done by obtaining good faith loan costs from lenders that offer the same loan programs at the same rates. After this you need to subtract all fee amounts that are independent of the loan and add them up separately. The loan that has the lowest total fee amount is the cheapest loan.

This method will work only when you are comparing loans that have the same interest rates.