Definition:
Annual Percentage Rate (APR) is the annualized cost of borrowing money, expressed as a percentage. It takes into account the interest rate on a loan plus any fees or charges associated with the loan. APR is a standardized measure that allows consumers to compare the costs of different loans, including credit cards, mortgages, and auto loans.
Key points about APR:
- Interest rate: APR includes the interest rate charged on the loan.
- Fees and charges: APR also includes any fees or charges associated with the loan, such as origination fees, late fees, or annual fees.
- Standardized measure: APR provides a standardized way to compare the costs of different loans, even if they have different terms or structures.
- Truth in Lending Act: The Truth in Lending Act requires lenders to disclose the APR on all loans to consumers.
Why is APR important?
- Consumer protection: APR helps consumers make informed decisions about borrowing money by providing a clear and comparable measure of the cost of a loan.
- Financial planning: Understanding APR can help consumers plan their finances and budget for loan payments.
- Regulatory compliance: Lenders are required to disclose the APR on all loans, which helps to ensure compliance with consumer protection laws.
In essence, APR is a crucial metric for understanding the true cost of a loan and making informed borrowing decisions.
