Annual Percentage Rate
The Annual Percentage Rate (APR) is the true cost of borrowing money expressed as a yearly percentage that includes not only the interest rate but also additional loan costs such as origination fees, discount points, and other lender charges. APR provides a more comprehensive picture of the total cost of a mortgage than the interest rate alone.
Example
“While the mortgage's interest rate was 6.5%, the APR was 6.8% once closing costs and fees were factored in.”
Memory Tip
APR = 'All Payments Revealed' - it shows the complete yearly cost, not just the basic interest rate.
Why It Matters
Comparing APRs between different lenders helps borrowers identify the true cost of loans and make informed decisions, as a loan with a lower interest rate might have a higher APR due to excessive fees.
Common Misconception
Many borrowers believe that the interest rate and APR are the same thing.
In Practice
Mike compared two mortgage offers: Lender A offered 6.5% interest with a 6.8% APR, while Lender B offered 6.75% interest with a 6.9% APR, helping him realize that Lender A was the better deal despite having higher upfront fees.
Etymology
Coined in the 1960s Truth in Lending Act to force lenders to reveal the true yearly cost of loans, preventing them from hiding fees in fine print.
Common Misspellings
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