LOANS APR: COSTS INCLUDED IN THE CALCULATION

2007-03-08 10:33:40

( Financial )



What is Loans APR?

APR is an acronym for Annual Percentage Rate. It is the effective interest rate charge to loans. Loans APR does not only include the cost of interest rate but also other fees and costs inputted into the cost of the loan. These costs are incurred from application, evaluation, processing and approval of the loan.

Loans APR shows the total cost of borrowing. Discounts points, origination fees, mortgage insurance premiums, prepaid mortgage interest, and other application fees are the costs that are usually inputted to compute for loans APR. These costs are computed as one through the APR. The APR will be used to compare the cost of loans across lenders as required by the Truth in Lending Act.

However, some lenders do not present the real loans APR by not inputting other fees into the computation of APR. Routine one time fees and penalties are not inputted in the computation of APR. Routine one time fees cover attorney’s fees and the cost of documentary stamp. Thus, sometimes it is not a good measure of comparing the cost of loans across lenders. Lowest APR might not mean the lowest among financial products. However, it is a good way of assessing the cost of loans you are applying from a lender and compare it with the standard average cost in the industry.

APR Loans Calculation

Calculation of loans APR depends on the term or period that the loan will be repaid. Thus, an APR for a 20 year term loan cannot be compared with the APR of a 30 year term loan. Paying off the loan earlier than the agreed loan term will shoot up the effective interest rate or the APR.

You can use loans APR as a tool to know the cost of financial products across lenders. Although it is not an accurate measure it can help you determine the extent of costs included in each product of the lender and will provide you an idea how costly it is compared to others.


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