Annual Percentage Rate (“APR”)
What It Means
Annual Percentage Rate, often simply referred to as APR, is the simple interest rate charged (or earned) annually on debt, along with any associated fees. APRs can be fixed over the life of a loan, as they are in car loans, or they can be variable, as they are in credit cards. APRs are expressed as a percentage.
APR is calculated as follows:
Why It’s Important
The Truth In Lending Act requires financial institutions to disclose the APR to make interest rates more transparent for consumers. It is a useful measure of the cost of debt, but it is important to understand what it does and does not include.
APR Includes:
Costs and fees from loan origination
Nominal interest rate
APR Excludes:
Compounding effects
Fees that a lender may decide to leave out
Late fees and penalties
Because lenders have some discretion in which fees to include in the APR calculation and longer loan durations can have the effect of diminishing the impact of large up-front costs over time, it is difficult to compare two APRs that may have very different underlying cost structures. Even APRs that include all of the cost information leave out the effects of compounding, which can have a significant effect on the total interest you end up paying or receiving. For this reason, you shouldn’t use APR alone when considering the terms of debt and should also look at other metrics, such as the Annual Percentage Yield.
Related Terms
Related Posts
![[Updated] Should the election results affect when you sell your business?](https://images.squarespace-cdn.com/content/v1/5e550e103e39304da8e5e0b1/1618456279294-VPPST5IPG40XNFI8GJ4K/AdobeStock_22668110_white-house.jpeg)
