Annual Percentage Rate (APR)
Candlefocus EditorThe APR provides a consistent basis for presenting interest rate information, by taking into account factors such as the frequency and type of payment, and whether loan application fees or prepayment penalties are included. The APR is expressed as a percentage and is presented before the loan agreement is signed. This helps protect consumers from misleading advertising by requiring financial institutions to disclose their interest rates and make them easier to compare.
The APR seems straightforward, but as with anything, there are exceptions and nuances to be aware of. For instance, lenders have a fair amount of leeway in calculating the APR, which means some fees may not be reflected in the calculation. It is also important to note that the APR is not the same as the annual percentage yield (APY). The difference between the two is that the APY takes into account the compounding of interest over the life of the loan.
Ultimately, when making financial decisions, it is important to understand the difference between the APR and the APY so that consumers can properly compare different loan products and make informed decisions. The APR is an important metric to consider when gauging the cost of borrowing and provides a consistent measure of comparison when evaluating loan options.