Annual Percentage Rates (APR’s) are best suited as a financial tool to be used when shopping for a loan or mortgage. An APR reflects fees, costs, and interest rates. Keep reading to learn how the annual percentage rate measures the true cost of a loan.
Annual Percentage Rates provide an in-depth financial perspective than interest rates. If they are not properly analyzed, an APR can be a misleading financial concept. Lenders have different options to choose which fees to include in their APR calculations and have the option to omit others. The cost of a loan changes from lender to lender which reduces the reliability of the APR calculation as a comparison tool.
There are several factors that impact the movement of an Annual Percentage Rate. The following factors impact how the annual percentage rate measures the true cost of a loan.
It is important to understand a few things about the concept of the APR.
The Annual Percentage Rate shows the interest rate a credit card user will pay. The APR calculation for credit cards exclude compounding interest. Those who make the minimum payments each month, will be paying interest on interest eventually (this is known as compounding) and should be avoided at all costs. Compounding interest can increase the cost of borrowing.
When researching a credit card, you need to compare lender fees separately. How you plan to use the credit card will sometimes be the deciding factor when comparing the APRs. There are times where a credit card will also have multiple APRs depending on the transaction or balance transfer.
The Annual Percentage Rate is more complex from a mortgage perspective because the APR includes the interest charges plus the costs. A borrower needs to evaluate the APR and the specific issues that are associated with mortgages.
The length of time you are intending to use the loan is important. The Annual Percentage Rate calculates the loan costs over the life of the loan so if you want to keep the loan for a short amount of time, the APR is higher.