Legal Definitions - APR

APR stands for Annual Percentage Rate.

The APR represents the total yearly cost of borrowing money or the total yearly earnings from an investment, expressed as a percentage. Unlike a simple interest rate, the APR provides a more comprehensive measure because it includes not only the interest charged but also certain other fees and charges associated with the loan or financial product. This allows consumers to compare the true cost of different credit offers on a standardized, annual basis.

• Credit Card Offer: Imagine you receive two credit card offers. Card A advertises an interest rate of 15%, but has an annual fee of $50 and a $25 application fee. Card B advertises an interest rate of 16% with no annual fee and no application fee. When calculating the APR for each card, Card A's APR would be higher than 15% because it incorporates the annual and application fees into the total yearly cost of borrowing. Card B's APR would be closer to 16% as it has fewer additional fees.

  This illustrates APR because it shows how the rate goes beyond just the stated interest. The APR for Card A would reflect the additional fees, giving you a more accurate picture of the total cost of carrying a balance over a year compared to Card B.

• Automobile Financing: When purchasing a new car, you might be offered a loan with a stated interest rate of 4%. However, the lender also charges an origination fee of $300 and a document preparation fee of $50. The APR for this car loan would be slightly higher than 4% because it factors in these additional fees, spreading their cost over the life of the loan to show the true annual percentage cost of borrowing for the vehicle.

  This example demonstrates APR by showing that the "sticker price" interest rate isn't the whole story. The APR provides a single, all-encompassing percentage that includes the origination and document fees, allowing you to compare this loan's true cost against another car loan offer that might have a different interest rate and different fees.

• Home Mortgage: A bank offers you a mortgage with a 30-year fixed interest rate of 6.5%. However, to secure this loan, you must also pay closing costs that include points (a fee paid to the lender at closing to reduce the interest rate), an appraisal fee, and a loan processing fee. The APR for your mortgage will be higher than 6.5% because it incorporates these upfront fees into the overall annual cost of the loan over its term. This provides a more accurate representation of the total financial burden of the mortgage on a yearly basis.

  This scenario highlights APR's role in providing transparency for large loans. By including various closing costs and lender fees, the APR gives you a standardized way to understand the full yearly expense of your mortgage, making it easier to compare different mortgage products from various lenders.