Legal Definitions - annual percentage rate (APR)

The Annual Percentage Rate (APR) represents the total yearly cost of borrowing money or the total yearly earnings on an investment, expressed as a percentage. It is a comprehensive measure because it includes not only the interest rate but also other fees and charges associated with the transaction, providing a more complete picture of the true cost of credit on an annual basis.

Here are some examples to illustrate the concept of APR:

• Credit Card Offer: Imagine you receive an offer for a new credit card that advertises a 0% introductory interest rate for the first six months, after which the rate will be 18.99%. However, the fine print also mentions an annual fee of $50 and a late payment fee of $35. The APR for this credit card would factor in not just the 18.99% interest rate but also the impact of the $50 annual fee over the year, giving you a more accurate understanding of the total cost if you carry a balance. If you only looked at the interest rate, you might underestimate the true expense of using the card.

• Home Mortgage Loan: When a couple applies for a home mortgage, they might be quoted an interest rate of 6.5%. However, the lender also charges various fees, such as loan origination fees, processing fees, and title insurance, which can add thousands of dollars to the initial cost. The APR for this mortgage would be higher than the stated 6.5% interest rate because it incorporates these additional fees spread out over the life of the loan. This allows the couple to compare different mortgage offers more effectively, as a loan with a slightly higher interest rate but no fees might have a lower APR than one with a lower interest rate but significant upfront costs.

• Automobile Financing: A car dealership offers a loan for a new vehicle with an interest rate of 4.9%. However, to secure this rate, the buyer must also pay a documentation fee of $200 and a credit check fee of $50. The APR on this auto loan would be calculated to include the effect of these additional fees alongside the 4.9% interest rate. By looking at the APR, the buyer gets a clearer picture of the total annual cost of financing the car, rather than just the interest rate, which helps them make an informed decision when comparing financing options from different lenders or the dealership itself.